Microfinance and Poverty: Evidence Using Panel Data from Bangladesh

Topic :

Even though microfinance has been the focus of development and poverty reduction programmes for some time, this paper begins by suggesting that development practitioners still know relatively little about the extent of poverty reduction possible through microfinance activities. The purpose of this article is to examine the impact of microfinance on consumption poverty in Bangladesh using panel data from household surveys for 1991/92 and 1998/99.

Khandker and Pitt (2003) – “The Impact of Group-Based Credit on Poor Households: An Analysis of Panel Data from Bangladesh”, World Bank, Washington DC – examined the impacts of microfinance on a number of outcomes using panel household survey from Bangladesh. More specifically, they considered such issues as whether the effects of microfinance are saturated or crowded out over time, whether programs generate externalities, and whether the estimated impacts of microfinance found earlier with cross-section data analysis can be corroborated using an alternative method. They found a declining long-term effect of microfinance as well as the possibility of village saturation from microfinance loans.

This article uses the same household panel data to address related issues, focusing on the poverty reduction impact of microfinance. The paper begins with an assessment of whether household and individual factors such as land and education influence a household’s demand for a loan in microfinance schemes where the decisions to borrow are made by a group. It then assesses whether microfinance reduces poverty and, if so, what the limits of poverty reduction through microfinance are. Third, the paper examines the spillover effects of microfinance, to determine whether the program benefits households beyond those that participate.

The results suggest that access to microfinance contributes to poverty reduction, especially for female participants, and to overall poverty reduction at the village level. Microfinance thus helps not only poor participants but also the local economy.

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