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Fighting Poverty with Microcredit: Experience in Bangladesh / Shahidur R

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Fighting Poverty with Microcredit: Experience in Bangladesh / Shahidur R 1 853 .*.. Oct. vq Public Disclosure Authorized Public Disclosure Authorized E'p ri e inBaigaae s'4 iduIk.Ihill(vh Public Disclosure Authorized Public Disclosure Authorized FightingPoverty with Microcredit FightingPoverty with Microcredit Experience in Bangladesh Shahidur R. Khandker Publishedfor the WorldBank Oxford University Press Oxford University Press OXFORD NEW YORK ATHENS AUCKLAND BANGKOK BOGOTA BUENOS AIRES CALCUTTA CAPE TOWN CHENNAI DAR ES SALAAM DELHI FLORENCE HONG KONG ISTANBUL KARACHI KUALA LUMPUR MADRID MELBOURNE MEXICO CITY MUMBAI NAIROBI PARIS SAO PAULO SINGAPORE TAIPEI TOKYO TORONTO WARSAW and associated companies in BERLIN IBADAN ( 1998 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. Published by Oxford University Press, Inc. 198 Madison Avenue, New York, N.Y. 10016 Oxford is a registered trademark of Oxford University Press. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electron- ic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press. Manufactured in the United States of America First Printing October 1998 The findings, interpretations, and conclusions expressed in this study are entirely those of the author and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. Cover: Woman at chalkboard and woman holding jug by Kay Chernush/The World Bank. Woman weaving basket by Salahudin Azizee, used with permission from Grameen Bank. Library of Congress Cataloguing-in-Publication Data Khandker, Shahidur R. Fighting poverty with microcredit: experience in Bangladesh / Shahidur R. Khandker. p. cm. Includes bibliographical references and index. ISBN 0-19-521121-9 1. Microfinance-Bangladesh. 2. Microfinance. I. Title. HG178.33.B3 K49 1998 332.7-dc2l 98-37303 CIP Contents Foreword ix Acknowledgments xi I Poverty Alleviation and Microcredit Programs 1 2 The Evolution of Microcredit Programs in Bangladesh 16 3 Socioeconomic Impacts of Microcredit Programs 37 4 Growth Potential of Activities Financed through Microcredit 63 5 Institutional and Financial Viability of Microcredit Programs 84 6 Microcredit Programs and Rural Financial Markets 110 7 Cost-Effectiveness of Alternative Poverty Alleviation Programs 133 8 Conclusions and Policy Implications: What Have We Learned? 145 Appendixes A Statistical Tables 159 B Description of the Sample Used in the Bangladesh Institute of Development Studies-World Bank 1991/92 Survey 180 C Evaluating Microcredit Programs 182 D Resolving the Problem of Endogeneity in Estimating the Impact of Credit 205 Bibliography 209 Index 219 v VI CONTENTS Tables 2.1 Features of the Food-for-Work and Vulnerable Group Development Programs in Bangladesh 22 2.2 Features of Three Microcredit Programs in Bangladesh 24 2.3 Codes of Conduct for Members of Microcredit Programs 26 3.1 Rates of Poverty and Net Worth Accumulation before and after Program Participation 58 4.1 Sectoral Distribution of Loans, 1990-94 68 4.2 Size and Type of Loans by Formal, Microfinance, and Informal Lenders 71 4.3 Size and Type of Loans by Program Participation Status 72 4.4 Estimated Marginal Returns to Labor and Capital for Selected Activities 74 4.5 Capital-Labor Ratios by Activity 74 4.6 Capital-Labor Ratios by Program Participation Status 75 4.7 Marginal Returns to Capital and Labor for Nonfarm Activities by Length of Program Participation 76 4.8 Credit Constraints and Loan Amounts by Sources of Credit 77 4.9 Sources of Start-Up Capital for Rural Nonfarm Activities by Program Participation Status 78 4.10 Marginal Returns to Capital and Capital-Labor Ratios by Primary Sources of Finance 78 4.11 Marginal Returns to Capital and Labor and Capital-Labor Ratios for Purely Rural Areas and Rural Growth Centers 80 5.1 Villages Covered and Number of Village-Based Organizations of Grameen Bank, BRAC, and RD-12, 1989-94 87 5.2 Members and Borrowers of Grameen Bank, BRAC, and RD-12, 1989-94 88 5.3 Loan Disbursements, Loans Outstanding, and Member Savings at Grameen Bank, BRAC, and RD-12, 1990-94 89 5.4 Funds Received by Grameen Bank and BRAC, 1986-94 90 5.5 Staff Size and Dropout Rates for Grameen Bank, BRAC, and RD-12, 1990-94 93 5.6 Staff Productivity at Grameen Bank, BRAC, and RD-12, 1990-94 94 5.7 Annual Member Dropout Rates for Grameen Bank, BRAC, and RD-12, 1986-94 96 5.8 Cost Structure of Lending and Break-Even Interest Rates at Grameen Bank and BRAC, 1990-94 98 5.9 Financial Margins and Profits at Grameen Bank and BRAC, 1991-94 98 5.10 Interest Rates and Subsidies for Grameen Bank and BRAC, 1990-94 103 CONTENTS VIl 5.11 Extent of Subsidies and Subsidy Dependence by Grameen Bank and BRAC, 1990-94 104 5.12 Nominal and Real Lending Rates Charged on Regular Loans by Grameen Bank, 1989-94 107 5.13 Landlessness and Poverty in Target Households, 1991/92 107 6.1 Agricultural GDP and Formal Agricultural Credit in Bangladesh, 1983-94 113 6.2 Loan Recovery on Agricultural Loans by Formal Lenders, 1981-93 115 6.3 Recovery Rates on Agricultural Loans by Formal Lenders, July 1, 1994, toJune 30, 1995 116 6.4 Performance of Major Financial Institutions, 1990-94 120 6.5 Subsidy Dependence of Formal Finance and Microfinance Institutions, 1994 121 6.6 Average Loan Size and Distribution of Loans by Sector 126 6.7 Average Loan Size and Distribution of Loans by Landholding 128 7.1 Costs of Delivering Services of Alternative Credit Programs, 1991/92 135 7.2 Cost-Effectiveness of Alternative Credit Programs, 1991/92 136 7.3 Cost-Effectiveness of the Food-for-Work and Vulnerable Group Development Programs, 1991-92 139 7.4 Cost-Effectiveness of Infrastructure Development 141 A3.1 Bivariate Tobit Fixed-Effect Estimates of Demand for Credit by Gender 159 A3.2 Impact of Credit on Selected Household Outcomes 160 A3.3 Joint Significance of Various Credit Variables on Socioeconomic Outcomes 162 A3.4 Thana-Level Fixed-Effect Estimates of Impacts of Credit on Selected Anthropometric Measures of Children 162 A3.5a Estimates of the Impact of Credit on the Seasonality of Consumption 163 A3.5b Estimates of the Impact of Credit on the Seasonality of Labor Supply 163 A3.6 Village-Level Impacts of Microcredit Program Intervention 164 A3.7 Microcredit Program Impact on Village-Level Poverty 166 A4.1 Determinants of Participation in Rural Nonfarm Activities 167 A4.2 Cobb-Douglas Production Function Estimates for Rural Nonfarm Activities 168 A5.1 Determinants of Branch Manager Salaries at Grameen Bank, BRAC, and RD-12 170 A5.2 Determinants of Member Dropout Rates for Grameen Bank and BRAC 171 Vil CONTENTS A5.3 Determinants of Branch-Level Loan Recovery Rates for Grameen Bank and RD-12 172 A5.4 Estimated Marginal Cost of Membership, Lending, and Savings Mobilization for Grameen Bank, BRAC, and RD-12 172 A6.1 Determinants of Individual Borrowing 173 A6.2 Determinants of Informal Interest Rates at Village Level 174 A6.3 Determinants of Informal Interest Rates on Individual Loans 175 A6.4 Determinants of Interhousehold Transfers in Taka 176 A6.5 Determinants of Sources of Borrowing for Agricultural Loans 177 A7.1 Effects of Education and Test Scores on Individual Participation in Microcredit Programs 178 A7.2 Effects of Education and Test Scores on Individual Participation in Wage Employment 179 Figures 3.1 Program Participation among Target Households 39 3.2 Length of Program Participation 40 3.3 Distribution of Agricultural Landholding among Program Participants 41 4.1 Distribution of Rural Nonfarm Activities, 1991-92 66 4.2 Distribution of Sources of Employment and Income in Bangladesh, 1991-92 67 6.1 Sources of Rural Loans, 1985 and 1991/92 114 6.2 Productivity of Agricultural Development Banks and Microfinance Institutions, 1990-94 118 Foreword Microcredit programs are of great interest to policynmakers because of their potential for reducing poverty, particularly among women. Programs based on the Grameen Bank model of group-based lending have flourished in Bangladesh and elsewhere, and microcredit institu- tions have emerged in dozens of other countries as well. Past research has examined specific measures of program performance, such as sub- sidy dependence and loan recovery rates, but the efficiency of these pro- grams as instruments for reducing poverty has not been evaluated. This study assesses for the first time the cost-effectiveness of microcredit programs as instruments for poverty reduction. Based on extensive survey data from Bangladesh, this study shows that microcredit programs are an effective policy instrument for reducing poverty among poor people with the skills to become self-employed. It also shows that such programs are more cost-effective than some other types of antipoverty programs. Microcredit programs were found to be particu- larly important for Bangladeshi women, many of whom are restricted by social custom from seeking wage employment. Their only source of income is self-employment, and they face difficulty in accessing individual lending programs. Defying traditional wisdom, women (who constitute 94 percent of Grameen Bank members) have proved to be excellent credit risks, with a rate of default that is less than one-third that of men. For all three of the microcredit programs studied, the impact on household consumption was twice as great when the borrowers were women. Women who participated in microcredit programs also increased their net wealth and their status within the household, and improved the lives of their children as well. The policy implications of the book's findings will be of particular inter- est to government decisionmakers, international donors, and practitioners of microfinance.
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