MICROFINANCE PAPER WRAP-UP: “Dynamic Effects of Microcredit in Bangladesh,” Published by the Development Research Group of the World Bank

“Dynamic Effects of Microcredit in Bangladesh,” by Shahidur R. Khandker and Hussain A. Samad, published by The World Bank, March 2014, 50 pages, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2417519

Microfinance institutions (MFIs) in Bangladesh have experienced rapid growth over the past two decades and in 2008 disbursed approximately USD 1.8 billion to approximately 30 million clients. However, their effectiveness in alleviating poverty has been debated for years. This study, commissioned by the World Bank, a US-based multilateral institution, seeks to address this issue. The authors of the report – using data gathered between 1991 and 2011 from approximately 3,000 households in 87 villages in Bangladesh – argue that microcredit programs have reduced the poverty rate in these communities by increasing household income and facilitating women’s participation in the labor market.

Using a fixed effects (FE) statistical model, the study provides evidence that microcredit programs in Bangladesh have reduced poverty and improved social conditions. According to the study, a 10-percent increase in the amount of credit accessed by men raises per capita household expenditures by 0.04 percent, male labor supply by 0.18 percent and net worth by 0.2 percent. The same borrowing increase among women increases per capita income by 0.06 percent, raises female labor supply by 0.46 percent and raises boys’ and girls’ school enrollment by approximately eight percent.

As of June 2011, there are 576 registered MFIs operating in Bangladesh, and 32 percent of microcredit borrowers are members of multiple lending programs. The study seeks to address concerns that there is a glut of MFIs that are competing for the same clientele and enabling individuals to borrow from multiple sources leading to overindebtedness. According to the authors, there is no evidence that membership in multiple lending programs improves or diminishes a household’s net worth. Furthermore, regions saturated with MFIs have more sources of credit available to borrowers, which leads to increased household net worth, non-land assets and participation in the labor market by both males and females.

The authors describe the research methods used in this report, which includes statistical models, regression analysis and several techniques used to control for biases in the data. The authors used “long panel data” – information from multiple individuals spanning multiple time periods – as opposed to cross-sectional data – information from multiple individuals at a single time period – because they believed that long panel data more accurately captures the “dynamics” of microcredit’s influence such as changes in lending methods that have occurred over the years in Bangladesh.

The authors conclude the report with a set of policy recommendations. Approximately two thirds of projects supported through microfinance loans are in the trade sector. The authors argue that in order to boost household incomes and reduce poverty, job skills training for various vocations must be administered. Additionally, improving marketing networks can help expand access to goods and services beyond local markets and encourage individuals to adopt new skills.

By Meraj Husain, Research Associate

About the World Bank Group

The World Bank Group (WBG) is a US-based development bank that consists of five institutions, all of which are owned by its member countries. The Group’s mission is to improve living standards for people in the developing world. The World Bank Group encompasses the International Finance Corporation (IFC); the Multilateral Investment Guarantee Agency (MIGA); the International Centre for Settlement of Investment Disputes (ICSID) and the World Bank, which consists of the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). WBG has 120,000 employees and operations in approximately 120 countries as of July 2013 and an active grant and loan portfolio of USD 173 billion as of June 2012.

Sources and Additional Information

[1] The World Bank: Dynamic Effects of Microcredit in Bangladesh

MicroCapital, January 21, 2014, Global Financial Development Report 2014, Published by the World Bank

MicroCapital, October 15, 2013, “A Microcredit Crisis Averted: The Case of Bangladesh,” by Greg Chen and Stuart Rutherford, Published by CGAP (Consultative Group to Assist the Poor)

MicroCapital, October 9, 2013, Bangladeshi Grameen Bank to Be Placed Under Jurisdiction of Bangladesh Bank

MicroCapital Universe Profile: World Bank Group

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