Informal lending a debt trap

In Bangladesh, alongside banks, there exists a vast network of informal lenders who offer quick loans without the paperwork or restrictions that banks require. While convenient, these informal loans come with high-interest rates that can quickly trap borrowers in a cycle of debt. For many, what begins as a short-term solution for emergencies or basic needs turns into long-term financial hardship, as the interest rates from these lenders are significantly higher than those of formal institutions.

The key problem is that many borrowers end up paying off only the interest, never touching the principal amount. This endless cycle means people are essentially paying many times the original loan amount without ever reducing their debt. Over time, they become trapped, as each month's payment is absorbed by interest alone. Some even resort to borrowing from other informal lenders to cover this cost, which only deepens the trouble.

Unlike banks, which are regulated by the government with set interest limits and protections for borrowers, informal lenders operate outside these rules. This lack of regulation means they can set arbitrary interest rates, demand collateral, or employ intimidation tactics to ensure repayment. Borrowers, especially those with limited options, often feel helpless, as there is no legal recourse available for them to negotiate or restructure these debts.

This cycle of informal lending pushes many families deeper into poverty, as income that could be spent on essentials like food, education, or healthcare is instead swallowed by debt payments.

The situation highlights the need for accessible, fair financial services for everyone, as well as better regulations to protect those who find themselves with no choice but to turn to informal lenders.

Sadman Islam Hridoy

School of Business and

Economics

North South University

[email protected]