Written by Serajul Hoque, graduate associate at the Department of Economics at Monash University in Australia, this study briefly investigates the impact of microcredit on rural Bangladeshi households. Published in January 2008, the paper is based on a RAND survey conducted over four years, and suggests a possible relationship between a household’s membership in a microfinance program, specifically the Bangladesh Rural Advancement Committee (BRAC, previously reported), and an increased ability to financially withstand economic hardships. Available online at http://www.microfinancegateway.org/content/article/detail/46789. Primarily an agricultural economy, households in rural Bangladesh are extremely susceptible to frequent and unpredictable natural disasters. Damaged crops, diseased livestock, and family illnesses can throw a household into economic turmoil every season, making poverty seem inescapable.
Hoque argues that participation in microcredit programs help reduce vulnerability to major seasonal events by providing households with a safety net: microfinance institutions (MFIs) help earning households build assets in non-critical times, and assist in emergency aid during critical times. Bangladesh, with a national poverty index of 44.33 percent, is one of the poorest countries in the world, and hosts more than 20,000 NGOs, of which the number of MFIs exceed 1,200.
This particular study focuses on 108 BRAC clients randomly sampled from the 149 villages in Matlab region of Bangladesh, a rural wetland 34 miles south of the capital, Dhaka. BRAC, founded in 1972, is the largest development organization in Bangladesh, and provides loans of USD 77 on average to 4,550,855 active borrowers (see MIX Market profile). Data for the study was obtained via the 1996 Matlab Health and Socioeconomic Survey (MHSS), conducted by the RAND Corporation, a nonprofit group specializing in research and analysis of international trends. The author randomly matched each of the 108 BRAC households with a non-BRAC household from the same village. The non-BRAC household was eligible for BRAC microcredit, but chose not to participate in microlending programs.
Hoque found that BRAC households received loans of about USD 112 approximately once every two years. The money was used almost equally for business costs and for basic needs: 55 percent of the loans would be used for “productive purposes” – farming machinery purchases, animal husbandry, or transportation costs, while 45 percent went towards “unproductive purposes” – household items and repair, groceries, or marriage, dowry, funerary, or medical costs. While 20 percent of BRAC households borrowed money to cope with economic hardship, only half as many non-BRAC households did so. Instead, non-BRAC households chose to sell assets (12 percent) or reduce expenses (15 percent), labeled as “negative coping mechanisms;” conversely, only half as many BRAC households used these strategies. Seven percent of BRAC households were able to use savings, a “positive coping mechanism,” while only four percent of non-BRAC households chose this option. Hoque uses these data to indicate a beneficial relationship between microlending and economic capability, and notes that more research is needed.
The results of the study, while perhaps an adequate summary of trends, are hardly conclusive and not entirely convincing. The terms “positive” and “negative” coping mechanisms should be defined more clearly: what are the implications of selling assets or using savings? The results of the study are further confused by the finding that 11 percent more BRAC households faced economic hardship than non-BRAC households. Ideally, the BRAC and non-BRAC groups should be equally likely to face economic hardship. This discrepancy suggests the influence of a hidden variable, and exposes a leap in logic made by the author in the experiment’s design: are BRAC households fundamentally more susceptible to hardship than non-BRAC households? And if so, does a heightened vulnerability cause the household to turn to an MFI for help in the first place? Because the possible hidden variable is unaccounted for in the paper, Hoque cannot make a strong argument for a causal relationship between participation in microfinance and ability to weather economic hardship.
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