Debt, Microcredit, and Mental Health: Causal Evidence and Mechanisms

Asuman Banywana

Humanities Education Kampala International University Uganda

Email asuman.banywana@studmc.kiu.ac.ug

                                                                                             ABSTRACT
Debt and microcredit are central to financial inclusion strategies in low- and middle-income countries (LMICs), yet their implications for mental health remain complex and contested. This paper examines the causal relationship between debt, microcredit access, and mental health outcomes, highlighting both beneficial and adverse effects. Drawing on observational studies, randomized evaluations, and meta-analytic evidence, it identifies key mechanisms through which debt influences psychological well-being, including financial strain, coping behaviors, social stigma, and exposure to economic shocks. While microcredit can enhance autonomy, facilitate income-generating activities, and improve resilience, it may also intensify stress due to high interest rates, rigid repayment schedules, and over-indebtedness. The analysis further demonstrates that the mental health effects of debt are heterogeneous, varying by gender, age, and socioeconomic status, with women and vulnerable populations often disproportionately affected. Importantly, the paper underscores challenges in causal identification and measurement, as well as inconsistencies in empirical findings across contexts. It concludes that microcredit is neither inherently beneficial nor harmful; rather, its impact depends on program design, borrower characteristics, and broader socio-economic conditions. Evidence-based policy design integrating financial safeguards, flexible lending structures, and mental health considerations is therefore essential to maximize benefits
while minimizing harm.

Keywords: Debt and mental health, Microcredit, Financial stress, Causal inference, Low and middle-income
countries (LMICs).

CITE AS: Asuman Banywana (2026). Debt, Microcredit, and Mental Health: Causal Evidence and Mechanisms. NEWPORT INTERNATIONAL
JOURNAL OF CURRENT ISSUES IN ARTS AND MANAGEMENT, 7(1): 44-53. https://doi.org/10.59298/NIJCIAM/2025/71.4453