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.