By Shahid Khandker and Hassan Zaman
In the 1970s, three out of four
Bangladeshis lived in poverty and the country was considered a test case
for development. Rapid population growth, frequent natural disasters,
and low economic growth throughout the 1980s suggested that a large
number of households would remain trapped in chronic poverty.
Defying this outlook, Bangladesh began
experiencing more sustained economic growth since the 1990s, which was
accompanied by impressive poverty reduction. For example, in 1991-92,
about 60% of the population was below the poverty line and around 50%
was below the extreme poverty line. By 2005, those figures had gone down
to 40% and 25% respectively.
The Bangladesh economy began
experiencing structural changes in the 1990s following trade
liberalisation and domestic market reforms. In urban areas, private
sector growth and employment were spurred by rapid growth in garments
exports while rural areas benefited from the deregulation of agriculture
markets, boosting agricultural production. At the same time, relatively
higher paying rural non-farm opportunities increased and the labour
force slowly began to shift away from agriculture.
All in all, declining population growth
rates, improved human capital, improved infrastructure, mainly in the
form of more extensive road communications networks, and increased
foreign remittance have been put forth as factors explaining
Bangladesh's enhanced growth and declining poverty.
But what was the contribution of
microfinance to this impressive performance? It is impossible to put an
exact number but we can look at some published evidence to get a sense
of where micro-credit is making a difference and where it may not be.
The World Bank's 2008 Poverty Assessment has two findings in this
context.
First, PKSF programme coverage data suggest that since 2000 microfinance
has expanded more in areas that were poorer, presumably because the
better-off geographical areas were covered in the previous decade.
Secondly, the report shows that the reduction in poverty in rural
Bangladesh has been much more in upazilas where microfinance membership
increased more rapidly, after accounting for other factors which drive
poverty reduction. There are other published papers which go beyond the
geographical variation of microfinance coverage and effects.
Two well known studies assess short and
medium-term microfinance impacts from the borrowers' point of view,
using repeated household surveys carried out in rural Bangladesh. Using
nationally representative data, their findings suggest that poverty
reduction among the borrowers due to microfinance is 1.6 percentage
points per year. Moreover, microfinance programmes have spillover
effects on the non-borrowers -- their poverty level goes down by 0.3
percentage point a year.
Even without the income gains, the poor
may still benefit from microcredit services if it helps them withstand
income and non-income shocks such as an economic disaster resulting from
the sudden death of a productive family member, the loss of an economic
asset, or natural disasters. Without some form of insurance (either
public or private), the poor may not be able to smooth consumption
during those disasters, which may lead to sharp cut-backs in essential
food and non-food expenditures.
Several studies confirm that
micro-credit programmes help households partially insure against shocks
so that they effectively play an important "safety net" role. One
carefully designed study finds that microcredit borrowers are about 50%
less prone to consumption fluctuation than their counterpart non-member
poor households in Bangladesh.
Clearly, further innovations are
required to strengthen this crucial risk-reduction role, and in general
to offer flexible financial services catering to different types of poor
households, in particular for the extreme-poor. One example is a
micro-finance programme known as PRIME, implemented by PKSF, which
offers a flexible repayment schedule and consumption smoothing, as well
as production loans. As a result, a recent evaluation shows that PRIME
is more effective than regular microfinance in reaching the ultra-poor,
as well as the seasonal-poor.
The discussion on the impact of
microcredit would be incomplete without referring to the broader package
of interventions that are provided with it. MFIs in Bangladesh vary
significantly in terms of their noncredit services though they typically
include training, related business development services and social
messages on education, health and civic rights. One published paper
finds that these noncredit interventions raise self-employment profits
in rural Bangladesh by 125% while the combined impact of credit and
noncredit interventions on self-employment profits is 175%.
The impact evaluation literature on
micro-finance in Bangladesh also contains some cautionary notes. For
example, it is clear that not all borrowers benefit equally as it
depends on their local economic environment, their entrepreneurial
ability and the extent their income sources are diversified. A few
studies also show that microcredit does little to change gender
inequities by limiting female control over loans.
However, on balance there is more
evidence suggesting that microcredit does influence gender relations
positively. Most published papers show that access to microcredit leads
to women taking a greater role in household decision making, having a
greater access to financial, economic and social resources and having
greater mobility in Bangladesh. .
It is clear that microfinance can
protect households from shocks, contribute to changing societal norms
about the role of women in society and lead to some households moving
out of poverty. Overall, it has played its part in the impressive
progress Bangladesh has made in poverty reduction over the past two
decades. Clearly, not everyone utilises loans productively, and there is
a risk of falling into over-indebtedness. So, the role of microfinance
should be strengthened through further innovations which take into
account these pitfalls.
Finally, microfinance is not a panacea
and will clearly not eliminate all poverty in any country. Thus, the
potential of microfinance can be best exploited by recognising the
lessons from careful impact evaluation studies, strengthening programmes
on the basis of this research and field experience, and by
incorporating micro-finance programmess into Bangladesh's overall
poverty-reduction strategy.
The writers are economists
based in Washington DC, and both have carried out research on the impact
of micro-credit in Bangladesh.
Source: http://www.thedailystar.net/newDesign/news-details.php?nid=177457
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