Report On

Impact of Microcredit in Poverty alleviation

Date of Submission: 19 December, 2009

Submitted To:

Dr. M. Khairul Islam

Professor
Department of Finance
Faculty of Business Studies
University of Dhaka

Submitted By:

NAME ROLL NO

Mohammad Rashedul Hassan 14021

Showmen paul Jitu 14025
Nanda Dulal Shaha 14029
Md. Hasan Imam
Md. Nazmul Hasan 14055
December 19, 2009

Dr. M. Khairul Islam

Professor
Department of Finance
Faculty of Business Studies
University of Dhaka.

Dear Sir,

We are glad to inform you that here is the case you assigned
us to prepare a report on “Microcredit & its impact on poverty
alleviation.” for the completion of our course “Business
Research Methodology”. In this report we have basically tried
to find out the impact of microcredit in poverty alleviation. We
have done several analyses in this regard. We have covered all
the necessary elements that should be included in a report.
Besides, we are still students and we are in a process of
developing our skills. So, we hope that you will be kind
enough to consider the limitations of this report.

Thank you for giving us such an opportunity of working on the

topic. We will be honored to provide you any additional
information, if necessary.

Sincerely yours

Mohammad Rashedul Hassan

Sowmen paul Jitu
Nanda Dulal Shaha
Md. Hasan Imam
Md. Nazmul Hasan
 Table of Contents

No. Topics Page No.

1. Introduction & Methodology 4
1.1 The rationale of the Study 4
1.2 Objectives of the Study 4
1.3 Methodology 5
1.3.1 Variables to be covered 5
1.3.2 Sample Design 5

1.3.3 Field survey 6

7
1.3.4 Quality Control
7
1.3.5 Data Processing
Background Information & Conceptual 8
2.
Framework
2.1 Literature Survey 8
2.2 Present status 9
2.3 Approaches used for assessing the Impact 14
3. Conclusion 20

Reference 20
1. INTRODUCTION AND METHODOLOGY

1.1. The Rationale of the Study:

Micro-credit refers to programs that are poverty focused and that provide financial and
business services to very poor persons for generation of self-employment and income.
Credit is a powerful instrument to fight poverty. The role of micro-credit in reducing
poverty is now well recognized all over the world. It is no longer the subject matter of
micro-credit practitioners alone. Governments, donors, development agencies, banks,
universities, consultants, philanthropists and others have increasing interest in it.

Credit creates opportunities for self-employment rather than waiting for employment to
be created. It liberates both poor and women from the clutches of poverty. It brings the
poor into the income stream. Given the access to credit under an appropriate institutional
structure and arrangement, one can do whatever one does best and earn money for it.
One can overcome poverty. One can become the architect of one–s destiny and the agent
of change not only for one–s family but also for the society.

Microcredit programs are aimed to protect the poor and helpless people from the strike of
poverty and provide them means to live a better standard of living. Microcredit programs
have long term vision to remove poverty by ensuring proper education, health & nutrition
and creating employment opportunities.

Population of Bangladesh was 161.915 Million in 2008. Due to the huge population the
GDP per capita is lower then the developed countries. The Human developed index is
very low compared to other developing countries. The HDI for Bangladesh is 0.547, as
per 2005 statistics. This rating ranks Bangladesh 140 th out of 177 countries. Despite
various Microcredit programs undertaken by the Government, the poverty reduction rate
is not so impressive. Proper steps need to be taken to choose the best option of
Microcredit programs and thus reduce poverty in effective way. A research is required
justify the performance of each Microcredit measure and select the most effective one.

1.2. Objective of the Study:

This study will evaluate the impact of Microcredit on the group of people (including
working age adults, elderly adults, disabled, widowed women, and hill tribes, other
minorities and disaster affected people) who are living under poverty or at least
vulnerable to poverty.

This study will research the ways in which the underprivileged groups or tribes are
affected by microcredit programs. Two primary research questions will be answered.
(The latter one is sub-questions of the first.

1. What effect does microcredit program have on alleviating poverty in the long run?
 2. Has program participation increased household consumption and income levels or
has had a beneficial impact on human capital accumulation and longer-term
income generation?

1.3. Methodology

1.3.1. Variables to be covered:

The following variables were identified to assess the effectiveness of various safety net
programs in the rural areas of Bangladesh

 Age.
 Family member.
 Monthly income & expense per household before the safety net program.
 Monthly income & expense per household after the safety net program.

The following attributes were also identified:-

 Employment status.
 Health condition.
 Education level.
 Daily diet chart.

1.3.2. Sample design:

Although, there are multiple theories regarding the size of the sample, we will
consider 10000 as a sample size considering the huge population and the complexity
and infeasibility. The sample will include both the group who are living under
hardcore poverty line and who are living under poverty line. For population data, we
have considered the following data from UNDP’s website.

Number and Percentage of Population below Poverty Line (CBN)

Residence 2000 2005

No in million Percent No. in million Percent
National 61.7 48.9 55.4 40.0
Rural 52.7 52.3 45.7 43.8
Urban 8.9 35.1 9.7 28.4
Source: HIES 2005
http://www.undp.org.bd/report/reports/safety.pdf

To get proper representation of all the groups from rural and urban sector we will
divide the total population under consideration in different stratum. The total sample
size will be collected in stratified random sampling method. The following table will
show the sample distribution.
Age group included in microcredit program Rural Urban
Children 10-14 2000 1500
Working age adult 20-55 1500 2000
Adult beyond the scope of employment 55 and 1500 1500
above

NB: in rural area, the percentage of children in sampling percentage is higher due to
the backwardness in education sector and microcredit program’s effectiveness on
including them successfully in primary education program/

1.3.3. Field Survey

The administration of the instruments will be through an organized team of field staff
for the purpose. The staffing pattern will be designed so as to ensure proper
administration of the instruments effectively to elicit required information, without
causing and dislocation of normal activities.

Prior to administering the instruments, a 7-day training program will be organized to

enable the field staff and supervisors to address their responsibilities effectively. The
training will particularly address the following areas:

 Purpose and objectives of the study;

 Detailed methodology;
 Selection of respondents
 Procedure for administering the Questionnaires/Interview schedules and the
checklists;
 Checking Questionnaires/Interview schedules and checklists at the field;
 Record keeping; and
 Other related issues.

To complete the entire work of data collection, a total of 50 field investigators and 5.
Supervisors will be deployed for 30 days.
1.3.4. Quality Control

To ensure quality control and effective monitoring, one supervisor will be deployed to
monitor the activities of a team of field investigators consisting of 3 to 4 members.
The responsibilities of the supervisors will include

 Ensuring appropriate selection of poor families

 Overseeing administration of the instruments by the field investigators
 Giving guidance to the field investigators, as needed
 Interviewing key officials, and
 Conducting FGDs and case studies, if needed.

A further step for ensuring quality control will be selective field visits by the
consultants, who will provide guidance to the supervisors/investigators.

1.3.5. Data Processing

Data Processing included: (i) checking, editing, and coding of the filled-in
questionnaires and checklists, and (ii) data entry and cleaning.

1.3.5.1. Checking, Editing and Coding

In the case of checking, editing and coding of the field data particular attention was
given to: (i) checking identification (ID) number of each questionnaire, (ii) checking
inconsistency among the questions, (iii) coding the open-ended questions, and (iv)
sample checking of the questionnaires by the consultants.

1.3.5.2. Data Entry and Cleaning

Data entry was done in SPSS for Windows. An appropriate data entry and cleaning
program were developed to ensure storing of error-free data. For checking whether
the responses to questionnaires are correctly entered, a manual checking was carried
out involving the services of 6 data entry operators and 6 data checkers for a period of
2 weeks. All possible logical verifications were done in computer to free the data
from all types of inconsistency and errors.

2. Background information and conceptual framework

2.1. Literature Survey:

1. There is increasing reliance on micro finance as an instrument of poverty alleviation in
Bangladesh. The Government of Bangladesh’s current Poverty Reduction Strategy
emphasizes the provision of micro credit as a key aspect of its poverty reduction strategy.
The establishment of the Bangladesh Poverty Alleviation Fund with World Bank
financing and the Grameen Bank with Asian Development Bank financing are based on
the underlying expectation that these initiatives will help to reduce poverty in
Bangladesh. Micro-finance has been an important aspect of the poverty alleviation
strategy of the NGO sector since the 1980s. The Rural Support Program has placed a
strong emphasis on helping the poor initiate micro-finance programs as an essential part
of their poverty reduction strategy. Women have been a participant in these efforts and,
following the example of Grameen Bank, some program have focused exclusively on
women. Despite this excessive reliance on micro-finance to be the panacea for poverty in
Bangladesh there has been surprisingly little work undertaken to assess the impact of
micro-finance on poverty and gender equity.

2. This background paper has been written with the primary purpose of assessing the
impact of micro finance on poverty and gender equity in Bangladesh. The paper has been
commissioned by the Bangladesh Micro-Finance Network (PMN) for presentation at a
seminar being hosted by the Network in December 2003. The main purpose of the
seminar is to publicly examine the research and empirical evidence and analytical work
available in this regard in the Bangladesh context and outline the parameters that are
useful to examine in the future to understand the impact of micro-finance on poverty
alleviation. It is expected that this exercise will help in sharing different approaches and
experiences, assist in forming a realistic expectation of the impact of micro-finance and
assess the extent to which micro-finance program may need to be redesigned to enhance
their impact on gender equity and poverty.

3. The paper is not based on any primary research but attempts to assess the different
approaches taken to this critical issue by various micro-finance practitioners and the
evidence that has been collected in Bangladesh in this respect. The report also scans the
approach to impact assessment that has been taken at the regional and international level
and the evidence that is available from the region in terms of the impact on poverty and
gender equity, particularly in Bangladesh. The main focus of this study was expected to
be on micro-finance. However, the major focus of micro-finance institutions in
Bangladesh has been on providing loans and most are exclusively providing credit. A few
NGOs, particularly the Rural Support Program have also initiated savings services but
this has not been the main focus of MFI services, and most, like the Orangi Charitable
Trust (OCT) challenge the rationale of savings given the current economic and financial
environment. While a few MFIs have initiated other financial services, such as micro-
leasing, insurance, remittance services, etc the volume and scope and outreach of these
services is so limited that it does not make much sense to assess their impact, at this
stage. Furthermore, informal financial markets have played a major role in providing
loans and other services. However, since these are extended largely by relatives, friends
and shop-keepers it was not possible to look at them in the same manner as MFI program.
Furthermore, the impact assessments that have been undertaken focus on the beneficiaries
of NGOs and as such most of the findings refer to credit provision by NGOs.
2.2 Present Status/ Existing Scenario:

Poverty is a global issue. Despite changes in development paradigms in the last half of
the 20th century, the promise to bring wellbeing to all human being remained unfulfilled.
As it stands, more than 100 million children of primary school age have never stepped
inside a class room, about 29000 children die each day from largely preventable
malnutrition and disease and more than 1.2 billion people in the world are struggling to
survive - at the margins of human existence “ on under a dollar a day.

Poverty is a problem for all the countries irrespective of their level of development. It can
be observed in many forms. It has both income and non-income dimensions. It may be a
lack of income or resources, a lack of coping capacity, a lack of basic human capabilities,
a lack of institutional defenses or in extreme cases a lack of all of these. In a wider sense,
it may be a combination of economic, social and political deprivations.

In consideration of poverty line, people in each country can broadly be divided into 2
categories namely poor and non-poor. The non-poor are living above and the poor are
living below the poverty line. The poor may be divided into destitute (bottom 10 percent
below the poverty line), extreme poor (those in the bottom 10 to 50 percentile of
households below the poverty line), and moderate poor (the top 50 percent of households
living below the poverty line). A further category of vulnerable non-poor may also be
recognized who may slip into category of poor anytime.

Poverty and Micro-credit:

There is an on going debate whether credit alone or credit plus is needed for poverty
reduction. There are views that credit alone on its own is inadequate to fight poverty. The
need for other services is also important in this respect. Such views, although, do not
negate the role of credit, fail to appreciate the role of credit on its own merit.

Nobody says that credit alone is cure for all. Most of the practitioners believe that credit
plays a vital role as an instrument of intervention for a poor person to discover her
potential and to stride for better living. Once this right is established, the entitlement to
other rights for leading a dignified life becomes easier. It empowers to break the vicious
cycle of poverty by instantaneously creating self-employment and generating income.
When in the ultimate analysis nothing can be said to be panacea, by overemphasizing that
micro-credit is not a panacea is in a sense overreacting and underestimating the role of
credit as an instrument to combat poverty. Micro-credit is itself a very powerful tool. But
if it is combined with others, it is definitely more empowering.

How micro-credit can reduce poverty may better be understood by understanding

conceptually the mechanisms by which financial services can affect the lives of the poor.
It is important to consider the fulfillment of basic needs (food, clothing, shelter, health,
education and psychological well-being), the means to achieve welfare at present and in
the future, social networks and empowerment and vulnerability to risk.

It is known that poor people live in a high risk and vulnerable conditions. Their ability to
take advantage of opportunities that will lead to increasing their income or economic
status, to protect themselves against risks of crises, and to cope with these when they
occur is very important. Reduction of poverty is partly a process of increasing income
and economic stability which enables fulfillment of basic needs and access to different
kinds of services. This may also be understood in the form of developing a range of assets
that will reduce the vulnerability of the poor to physical, economic and social shocks.
These assets may be defined as financial (income size, regularity and security, savings,
loans or gifts), human (skills and knowledge, ability to work, good health, self-esteem,
bargaining power, autonomy and control over decisions), physical (housing, land,
productive and nonproductive possessions etc.) and social (networks, group and centre
membership, trust based relationship, freedom from violence and wider access to society
and social institutions.

Poverty reduction may also be considered from both short term and long term
perspectives. In the short term it can be understood with reference to individual
borrowers, their households and also the society at large. Different studies conducted in
Bangladesh and elsewhere show that there is positive correlation between micro-credit
programs and their accrued benefits in terms of employment, income generation and
promotion of social indicators.

Micro-credit Impact:

A recent study concluded by the Bangladesh Institute of Development Studies and the
World Bank in Bangladesh provides a strong indication that Micro-credit do help the poor
in consumption smoothing as well as in asset building. The study also suggests that
micro-finance programs promote investment in human capital like schooling. It raises
awareness to reproductive health and increases both individual and household welfare.
While the short run impact of micro-credit has been widely acknowledged, the questions
are raised about its long run and aggregate impacts. Is it sustainable overtime? Given the
high incidence of poverty in countries like Bangladesh where micro-credit programs are
widespread and successful, critics argue that this
reflects the limitations of micro-credit as an instrument for poverty reduction.

The question, however, remains whether high incidence of poverty is a result of failure of
micro-credit movement or it is an outcome of a low economic growth rate. It may be
argued if significant poverty reduction is mainly a function of sustained high economic
growth, what is then the net over all contribution of micro-credit movement? These and
so many other questions may be raised in connection with impacts and effectiveness of
micro-credit programs but the fact remains that it helps the poor participants to overcome
their poverty and also benefits the non-participants because of its externality at the micro
level. If one considers the benefits of micro-credit programs enjoyed by different
categories of poor one gets mixed feelings.
The ongoing debate whether micro credit programs benefit the extreme poor deserves
critical evaluation. While many argue that the extreme poor get little benefit from it as
they are mostly excluded, a recent World Bank study in Bangladesh has come with
encouraging results. It reconfirms that micro-finance matters a lot for the very poor
borrowers and also for the local economy. It helps reduce extreme poverty more than
moderate poverty. Many MCPs ignore their commitment to the bottom poor on the
grounds that sustainability cannot be attained by providing financial services to the
extreme poor. They forget that sustainability is a directional goal. The immediate
nonnegotiable goal is to reach the poorest and enable them to lift themselves out of
poverty, which is the ultimate goal. One should not run for attaining sustainability
overnight at the cost of those who are very poor.

Evidences also show that serving the poorest and at the same time attaining sustainability
are not contradictory goals. It needs appropriate planning. For a well designed program it
is a matter of time. Though it has a waiting time it is highly rewarding. In order to meet
the clients needs and satisfaction, it is important that MCPs should have considered
appropriate product development that will serve different needs of clients and enables
them to improve the quality of their lives. Given the assumption that at the entry point all
clients should come from the poorest, the need for developing different products for
different levels of borrowers (1st , 2nd, 3rd time loanees and so on) is also important.

Once this, as well as, appropriate mechanism for credit delivery and recovery are in
place, it will not only reduce individual and aggregate poverty (may not be very
significant) but will also help create a strong foundation for sustainable operation of
MCPs.
How micro-credit programs impact the lives of the poor, can be learnt from the impact
studies of Grameen Bank (GB), its partners and others who are poverty focused.

Economic Effects:

Grameen has been widely researched and recognized for making a difference in the lives
of its members. Studies show that the borrowers of Grameen Bank are steadily moving
out of poverty. One such study shows that it is at the rate of 5% a year.

According to another study based on a household survey in an area where Grameen has
been operating for more than a decade, about 50% of the Grameen households have
crossed the poverty line. Another 25% were about to cross it and the rest was struggling
mainly because of health reasons.

A study examining the economic effects of Grameen on the life of its borrowers
compared the situations .before– and .after–, .with– and .without– Grameen. It considered
the effects of Grameen operation on capital accumulation, employment, and income and
poverty alleviation. The study found that without any capital base at the beginning, the
Grameen borrowers started accumulating capital as they joined Grameen which has not
been possible by others. Grameen loan is required to be paid back in small installments as
per agreement. The borrowers pay the installment from generated income, leaving the
original capital intact.

Their capital base usually increases in large amounts as they go for subsequent loans that
enable them to go for medium and long-term investments. The study also found that 31
percent of the borrowers reported themselves as unemployed before joining Grameen.
Grameen created new employment for them and especially for the female members who
were earning nothing before.

The effect of Grameen loans on reducing unemployment is impressive. The borrowers

were found less underemployed than before. More than 91 percent of the borrowers in the
survey area reported that Grameen had made a positive contribution to their standard of
living. The bank has been able to lift a significant proportion of its borrowers and their
household members out of poverty. A World Bank study found that profits from
Grameen-financed businesses were increasing borrowers– consumption by 18% per year,
and that the percentage of Grameen
borrowers living in extreme poverty was reduced by 70% within 4.2 years of joining.
According to a recent survey conducted by Grameen Bank the cumulative percentage of
borrowers who have crossed the poverty line until 2002 is over 46%.

Such findings of the above mentioned studies are corroborated by many other studies
conducted in different areas and at different points of time. Grameen is contributing
directly and indirectly to the gross domestic product of Bangladesh. During the period
1994-1996, its net contribution to GDP as ac percentage of total GDP in current prices
has been more than one percent. Grameen borrowers have been found to improve their
conditions in terms of housing and clothing too. They can afford more and warm clothes
during winter seasons. Till the end of April 2003, they have built 566333 houses with
housing loans from Grameen. Women are the owners of 95% of these houses. They hold
the title for the land of these houses. This was unthinkable for them before they joined
Grameen.

Coping Capacity

If an increasing capacity to cope with calamities is considered to be an indicator of

improving poverty situation, the experiences of micro-credit programs show that micro-
credit members are in better positions to cope with such situations.

During two and a half months of devastating floods that hit Bangladesh in 1998, it was
found that Grameen borrowers were relatively less vulnerable and more capable to deal
with the situation both during and after the flood. They had their savings, institutional
back-up and peer support. They were able to go for rehabilitation immediately after the
floodwater receded.

Grameen, as a provider of micro-credit, had a key role in ensuring not only the survival
of its borrowers and their family members during flood but also during their
rehabilitation after it. The crisis management capacity of Grameen borrowers was found
to be higher than others.

In fact, the severe flood provided both a challenge and an opportunity for the micro-credit
program in Bangladesh. The challenge was to recover from the losses caused by the flood
and to bring the poor back onto the path of sustainable development. The opportunity was
to consolidate and improve upon the existing modalities in order to bring the most
affected families within the fold of the MCP and to have more impact on the socio-
economic condition of the poor.

Grameen and other MCPs could do more under such disastrous situations if they had
access to more funds. Such funds are needed to replenish their cash flow which gets
depleted due to withdrawal of savings by members, fresh loans to old borrowers, new
loans to new borrowers and non-recovery of loans from flood affected borrowers.

Social Effects:

The poor have little access to education, health, sanitation and other social services. They
are socially condemned, rejected and powerless. In the case of poor women the situation
is more deplorable. In many societies including Bangladesh, women are generally
confined to their homes. They are not supposed to be seen by other than their family
members.

Their sphere of work is largely restricted. Under these circumstances, Grameen provides
them a forum, a network where they are organized into groups and federated into centers.
They become decision makers, leaders and a social force. They become group and center
leaders and also
members of the Board of Directors of Grameen Bank, which they own. In the Board of
Directors they are nine out of twelve members in total. The Grameen borrowers go for
implementation of social development programs under the "16 Decisions" that they have
taken. The Grameen borrowers who became village phone ladies by leasing cellular
phones for providing village pay phone (VPP) services to the neighborhood do not only
earn more, but also enjoy a gracious
Social status. These women have brought the world closer for themselves as well as for
their communities.

Grameen women have become mobile. They are exposed to the outside world and are
active participants in social networking and commercialization process by attending
center meetings, workshops, interacting with national and international dignitaries,
producing, selling and buying products. Grameen borrowers become more conscious
about their family size and family welfare and are determined to improve their quality of
life. Studies show that infant mortality among Grameen families has decreased by 34%,
and the adoption of family planning among them is double the national average for
Bangladesh.
In terms of education, Grameen borrowers– families are also ahead of others. In Grameen
families, all school-age children are going to school. After the introduction of the Higher
Education Loan (HEL) there are no case of children being deprived access to higher
education due to financial constraints. Whatever indicators such as respect from
neighbors and spouses, self-esteem, self-confidence, self-expression, ability to protest
social injustice, capacity to solve social issues are applied to measure changes in social
conditions of poor women, Grameen borrowers are found better off than others. The
process is continuing and progress is visible. This has all been possible because of their
access to credit.

2.3 APPROACHES USED FOR ASSESSING THE IMPACT OF MICRO-

FINANCE PROGRAM

A. Approaches Used for Assessing the Impact on Poverty

1. One of the most broadly shared perceptions about micro-finance is that it is beneficial
and therefore everyone needs and demands it. As a result, there has been very little
questioning about the benefits of micro-finance and until recently, little interest in trying
to measure its precise impacts. The approach generally followed is to expound the
benefits of micro-finance without citing any empirical evidence. Following a similar
approach, the Bangladesh Poverty Reduction Strategy Paper (PRSP) asserted that,
“access to credit is the surest way of empowering the poor and improving their income
generating opportunities”1 and that “international experience has shown that micro-credit
can be an important instrument in improving the income generating capabilities of the
poor.”2 Similarly, the Asian Development Bank’s assessment of the micro finance sector
in Bangladesh was that the “poverty reduction potential of micro-finance is widely
recognized at the policy level and among the development community.”3
2. Most international discourse on the subject also perceives micro-finance “as an
approach with significant further potential for poverty alleviation and economic
empowerment”. International literature further asserts that “micro-finance began
alleviating poverty several decades ago when organizations in Latin America,
Bangladesh, and other developing nations began testing the notion of lending small
amounts to impoverished people (mostly women). By the 1980s, the success of
institutions such as ACCION and Grameen prompted many NGOs and International
Organizations to provide micro-finance services. As more micro-finance institutions
(MFIs) proved that the poor were reliable borrowers, entrepreneurial, and willing to work
hard to escape poverty, the micro-finance industry grew to a remarkable 8,000 MFIs by
1999. Thus the growth in the MFI sector was sufficient proof that micro-finance was a
panacea for poverty.

3. The growth in the sector was being used to extol its virtues, partly because the proxy
indicators of repayment and disbursements were being used to evaluate micro-credit
program. Both in Bangladesh and elsewhere, it was assumed that if loan repayments were
being made and disbursements were growing then micro-credit must be yielding benefits.
Many program in Bangladesh followed this approach. Thus AKRSP, NRSP and PRSP all
assumed that since they had repeat borrowers and expanding program they were a
success. In order to simply reconfirm these benefits and illustrate this to the donors, most
practitioners got in-house staff and interns to document a range of case histories of
successful men and women to show how micro-credit was transforming lives. Most of the
cases studies were well written and while they did demonstrate the benefits of micro-
credit, they were romanticized versions of the power of credit, were generally poorly
researched and the financial analysis was undertaken in a fairly superficial and uneven
manner. In fact, staff undertaking the analysis was generally not trained to conduct
financial or economic analysis. Most of these studies documented success stories almost
exclusively as they were directed at a fawning audience which did not need more proof
about the large scale benefits of micro-finance. The failures were largely forgotten, if not
actually intentionally buried in the large plethora of loan applicants. In the early years,
this anecdotal evidence sufficed and no further efforts were made to assess the impact of
micro-credit.

4. It is only now being recognized that repayment is not an accurate indicator that funds
are used to invest in successful productive activities. Even when a borrower repays a loan
on time, the source of income is not necessarily from revenues generated by investing the
loan in productive activities. In most peer lending micro-credit programs, for instance,
borrowers must commence weekly installments almost immediately after the investment
is made. Hence, borrowers are either forced to choose activities that generate almost
immediate revenue (and these activities tend to generate the lowest returns), or they have
to repay the loan from other sources. In practice, repayment is often derived from general
family income rather than the activity for which loan has been provided. Hence,
repayment may be good, due to the economic status of the borrowing household,
discipline or peer pressure, regardless of business performance. 4 Some of the micro-credit
program in Bangladesh such as Kashf are designed for immediate repayment from other
household sources of income.

5. By the late 1980s, there was a wealth of anecdotal and qualitative case study evidence
to support popular perceptions regarding the positive benefits of micro-finance, but still
no carefully controlled longitudinal or cross-sectional surveys of borrowers and
comparable non-borrowers. Distinguishing between success and failure was still largely a
matter of perception, provided that the support funds continued to arrive. Moreover, as
long as loan-repayment rates were the primary quantitative indicator of performance,
program staff could manipulate numerous legitimate accounting procedures to ensure that
published rates remained high.5 In the late 1990s, development projects generally, and
micro-finance in particular, came under increasing pressure to show that returns on
investment were real and sustainable. In an era characterized by heightened political
pressure to defend the role and purpose of foreign aid, it was not enough for program to
be able to boast high loan repayments rates and cite simple case study evidence of
success.

6. In Bangladesh there has been a tendency to use anecdotal evidence and claims about
the impact of micro-credit are not well documented or supported by verifiable evidence.
Some of the evidence is quite weak because of inadequate data or questionable methods
used to collect and interpret the data.6 Some of the micro-credit program assert that they
cannot afford to undertake impact assessments because they are generally expensive and
time-consuming. There are also serious disagreements among experts on the validity of
methodologies used in some of the published studies. In some cases, even the more
rigorous studies have produced inconclusive results. The most frequently cited reasons
for not undertaking impact are that it is not required, it is too soon for impact to be
realized and that no matter what methodology one adopts it will be criticized.

7. A review of the micro-finance sector in Bangladesh reveals that the interest in

assessing the widespread impact of micro-credit on poverty is a relatively recent
phenomenon and that almost all the major studies in this regard were undertaken after
2000. The only study prior to this year was commissioned by the State Bank of
Bangladesh and this was undertaken as part of a series of studies by the Applied
Economic Research Centre on rural financial markets in Bangladesh. To date, this is the
largest study on the subject covering more than 6000 households and 24,000 respondents.
This is not an impact study but a survey of rural financial markets. However, the impact
studies that have been undertaken are not by the major NGOs in the sector where
reservations about the usefulness of impact still prevail. For example, AKRSP, NRSP and
PRSP have not undertaken any large scale impact assessments of their micro-finance
program. A study on NRSP was undertaken recently which looked at the issue of cost-
effectiveness, participation of the poor and impact. Among the main NGO practitioners 2
Pilot project have undertaken or commissioned impact studies. The Bangladesh Poverty
Alleviation Program has only recently completed a study of some of its partner NGOs
and the Grameen Bank is planning to undertake some studies in the future with the
assistance of USAID but no current assessment exist. A few small scale sample surveys
were undertaken by PIDE and independent researchers as part of the latest UNDP Human
Development Report which has examined the issue of micro-finance in detail

8. More recently the indicators that are being monitored in Bangladesh and the
orientation of the research is being fashioned by the concern with financial sustainability.
This concern has emerged as a result of international influence regarding the financial
sustainability i.e. a program’s capacity to remain financially viable in the absence of
domestic subsidies or foreign support – and has become the benchmark against which
both the efficiency and effectiveness of micro-finance program is being increasingly
determined. By this measure, Grameen Bank was declared less successful than
Indonesia’s BRI/BKK program, while the favoured approach of the 1960’s and 1970’s i.e
government’s heavily subsidizing commercial banks was denounced as an outright
failure. Yaron’s subsidy dependency Index (SDI) approach, while not without its own
problems, has also been complemented in recent years by significant improvements in the
standards and techniques of program evaluation research.

9. This concern at the international level has also permeated thinking in Bangladesh and
NGOs have been struggling to find measures to make themselves sustainable. Thinking in
this regard was influenced when practitioners were first exposed to the micro-finance
course in Boulder, Colorado where some of these ideas were expounded. Micro finance
thinking at AKRSP and NRSP was revolutionized by the ideas emanating from Boulder
and fairly key changes were made in these programs as a result. These ideas had a special
appeal in Bangladesh where very few micro-finance programs among Bangladeshi
NGOS were initially designed with the sustainability criteria in mind. Kashf and OCT
were an exception. NRSP has been particularly concerned with the issue as it had, at one
time, mistakenly calculated that its micro-credit program could yield enough margins to
sustain its entire development program. Organizations like AKRSP have taken a more
radical approach and transformed their micro-credit program into a formal sector bank in
pursuit of sustainability without a careful analysis of what this may mean for its initial
objective of poverty alleviation and gender equity. It is not surprising that the flagship
publication of the micro-finance industry; the Performance Indicators Report produced by
the PMN almost exclusively focuses on indicators such as financial sustainability,
operating efficiency and portfolio quality. The only indicator which could be used to look
at the poverty or gender equity aspects is the number of borrowers and the number of
savers. Furthermore, the PIR only gives the gender of savers and not of borrowers.

10. Impact assessment has been viewed largely as an activity that is to be commissioned
to an outside agency to ensure credibility and impartiality of the exercise. Thus, while
some MFIs like OCT maintain a detailed data base on their clients they do not store
variables that would help them determine the benefits of micro-finance for each client.
Kashf is also in the process of establishing a Monitoring and Information System that will
provide them regular information on clients on a wide range of client characteristics.
However, this data set is not designed to provide information on the poverty profile of
clients. None of the RSPs keep a client profile but some have started making a distinction
between poor and non-poor clients to be able to better assess the poverty targeting
potential of their interventions.

11. At the international level, there have been considerable developments in the field of
impact assessment and a vast and diverse academic literature exists on microfinance
impact assessment. Currently, microfinance impact assessment is moving away from
narrow, donor focused impact assessment events, towards more practitioner-focused
processes. There is recognition of the need to more clearly define the range of objectives
to be fulfilled and questions to be answered through impact assessment, and the range of
possibilities of approaches and tools available to meet these objectives. It is also proving
useful to distinguish between the different approaches to impact assessment. Impact
assessment for public policy tends to be associated particularly with "impact proving"
using more positivist methods, or quantitative data collection analyzed statistically.
Impact assessment for product development or organizational learning, in contrast, tends
to be associated with "impact improving" using more participatory methods, or reliance
on interpretation of mostly qualitative data.7 The former is regarded as more expensive
but more scientifically rigorous; the latter is cheaper and aims to be credible. There is
also a distinction between demand from within MFOs themselves for organizational
development, and from donors and regulators for public policy purposes 8 as is illustrated
in Table 2 below. While some NGOs have undertaken in-house studies for
developing financial products most of the studies undertaken in Bangladesh are of the
nature of “impact proving.”
 Table 2: Contrasting Sources of Demand for Impact Assessment

Impact assessment for public Impact assessment for product development

policy
Who for? Donor Service provider
When? Donor led agenda of promoting Organisation led agenda of seeking
(Historical increased provision of microfinance to cut costs and improve customer
context) where supply of services is deficient loyalty in order to survive (strong
(weak competition). competition).

What for? Is public money better used (at the What can be learnt from clients in
margin) to subsidise microfinance order to improve the prospects for
services or for other purposes? organisational survival?

Outcomes Green/red light for replication of “best Product differentiation in response

practice” models (e.g. village banking, to diverse local demands of
solidarity groups….) without much different categories of user.
differentiation of users.

Relative Impact of Anti-Poverty Policy Instruments

To raise the central question: how to allocate a given budget of concessionary aid
resources in a manner so as to achieve the largest possible impact on poverty? Is there
any way of even guessing it? Unfortunately, the poverty literature provides very little
answer to such a question so close to each policy maker's heart. We, therefore, remain
sensitive to the inadequacy of the proposed approach, which largely ignores the dynamic
effects, as well as synergies that exist among various anti-poverty policy instruments.
However, a comparative static exercise (involving with and without) is what we can
attempt at this stage as a second-best.
To address the relative impact of various anti-poverty policy instruments, we estimate a
multivariate model of income determination and use a number of data sets to check the
robustness of the findings. Data are available only for the rural areas, but this may not be
a major limitation of the exercise since, after all, about 85 percent of the national poor
still reside in rural areas.
Among the growth projects we are especially interested to see the effects of road,
electricity, expansion of new HYV technology, and access to non-agricultural assets (as a
proxy for microcredit). In addition, we are interested in assessing the impact of human
capital (as proxied by education).Each is reviewed in turn.
3. Conclusion

Poverty reduction is undoubtedly a doable proposition. It can be significantly and

rapidly reduced with Grameen type micro-credit programs provided:
required funds are available to the nascent micro-credit industry at reasonable
Costs,
a professionally, competent and motivated staff is engaged in performing the
operational tasks,
the communication or knowledge gap between donors and practitioners is
minimized.
the gap between words and deeds, assurances and actions, is narrowed down
And an enabling environment is created by removing the obstacles that stand in the way
of growth of micro-credit industry.

Reference:

Chowdhury, A.H.M.N. and Marcelia C. Garcia, Rural Institutional Finance in Bangladesh

and Nepal: Review and Agenda for Reforms, EDRC Occasional Papers
No. 3, Asian Development Bank, Manila, 1996.
Chowdhury, Omar H., and Shahidur R. Khandker, "Do Targeted Programs Improve the
Nutritional Status of the Poor?" in M. A. Latif et al, Credit programs for
the Poor: Household and Intrahousehold Impacts and Program
Sustainability, Vol. 2, 1996.
Government of Bangladesh (GOB), The Fifth Five Year Plan (FFYP) 1997-2002,
Planning Commission, Dhaka, 1998.