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Beyond Ending Poverty Beyond Public Disclosure Authorized Public Disclosure Authorized DIRECTIONS IN DEVELOPMENT Poverty Khandker, Khalily, and Samad Khalily, Khandker, Beyond Ending Poverty Public Disclosure Authorized The Dynamics of Microfinance in Bangladesh Shahidur R. Khandker, M. A. Baqui Khalily, and Hussain A. Samad Public Disclosure Authorized Beyond Ending Poverty DIRECTIONS IN DEVELOPMENT Poverty Beyond Ending Poverty The Dynamics of Microfinance in Bangladesh Shahidur R. Khandker, M. A. Baqui Khalily, and Hussain A. Samad © 2016 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 19 18 17 16 This work is a product of the staff of The World Bank with external contributions. 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All queries on rights and licenses should be addressed to the Publishing and Knowledge Division, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights @ worldbank.org. ISBN (paper): 978-1-4648-0894-4 ISBN (electronic): 978-1-4648-0895-1 DOI: 10.1596/978-1-4648-0894-4 Cover photo: © Jabeer Sherazy/Institute of Microfinance. Used with the permission of Jabeer Sherazy/ Institute of Microfinance. Further permission required for reuse. Cover design: Debra Naylor, Naylor Design, Inc. Library of Congress Cataloging-in-Publication Data Names: Khandker, Shahidur R., author. | Khalily, M. A. Baqui, author. | Samad, Hussain A., 1963- author. Title: Beyond ending poverty: the dynamics of microfinance in Bangladesh / Shahidur R. Khandker, M. A. Baqui Khalily, Hussain A. Samad. Description: Washington, D.C.: World Bank, 2016. | Series: Directions in development | “March 2016.” | Includes bibliographical references. Identifiers: LCCN 2016015272 (print) | LCCN 2016016935 (ebook) | ISBN 9781464808944 (pdf) | ISBN 9781464808951 | ISBN 9781464808951 Subjects: LCSH: Microfinance—Bangladesh. | Debt—Bangladesh. | Consumption (Economics)—Bangladesh. | Poor—Bangladesh—Social conditions. Classification: LCC HG178.33.B3 K43 2016 (print) | LCC HG178.33.B3 (ebook) | DDC 332.7/42—dc23 LC record available at https://lccn.loc.gov/2016015272 Beyond Ending Poverty • http://dx.doi.org/10.1596/978-1-4648-0894-4 Contents Preface xv Acknowledgments xvii About the Authors xix Abbreviations xxi Chapter 1 Introduction 1 Overview 1 Can Microfinance Uplift the Poor? 2 Inclusive Microfinance 2 Assessing the Dynamics of Program Benefits 3 Purpose and Organization of the Book 6 Notes 7 Bibliography 7 Chapter 2 Rural Nonfarm Growth and Poverty Reduction 9 Introduction 9 Poverty Trends 10 Income Growth Trends 12 Poverty Reduction and Growth of the Rural Nonfarm Sector 16 Linkages between Farm Income Growth and RNF Enterprise Expansion 21 RNF Enterprise Growth: A Closer Look 24 Dynamics of RNF Enterprise Activities 27 Summary 33 Notes 34 Bibliography 35 Chapter 3 Institutional Growth and MFI Performance 37 Introduction 37 Trends in MFI Growth Indicators 38 Growth and Sector Composition of MFI Lending 41 Have MFIs Drifted from Their Social Objective? 43 Evidence of Competitiveness in MFI Performance 45 MFI Funding Sources 48 Cost versus Operational Efficiency 50 Beyond Ending Poverty • http://dx.doi.org/10.1596/978-1-4648-0894-4 v vi Contents A Global Perspective 50 Summary 52 Annex 3A: Comparative Perspective of MFI Performance, 2004–12 54 Notes 56 Bibliography 57 Chapter 4 Dynamics of Microfinance Benefits 59 Introduction 59 Dynamics of Microcredit Participation 60 Pitfalls of Panel Data Analysis: Household Attrition and Split-Off 64 Estimates of Microfinance Impact Using Static Model 66 Short-Term versus Long-Term Impacts of Microfinance 70 Market Saturation and Village Diseconomies of Scale 74 Multiple Program Membership and MFI Competition 77 Summary 80 Annex 4A: Estimated Effects of Microfinance: Literature Review 82 Annex 4B: Joint Significance Test Results 83 Notes 84 Bibliography 86 Chapter 5 Are Borrowers Overindebted? 91 Introduction 91 Definitions and Drivers of Overindebtedness 92 Evidence on Indebtedness, Multiple Borrowing, and Credit Constraints 95 Determinants of Indebtedness: Does MFI Competition Matter? 102 Does Participation Density Matter for Indebtedness? 106 Summary 112 Notes 113 Bibliography 114 Chapter 6 Role of Microfinance in Poverty Transition 117 Introduction 117 Dynamics of Participation Status with Consumption and Poverty: What Is the Correlation? 119 Analysis of the Poverty Transition 120 Estimating Consumption and Poverty Effects of Microcredit Participation 124 Marginal Returns to Consumption for Microborrowing? 125 Predicted versus Estimated Poverty Effects 126 Impacts from Women’s Participation 127 Beyond Ending Poverty • http://dx.doi.org/10.1596/978-1-4648-0894-4 Contents vii Summary 128 Notes 129 Bibliography 131 Chapter 7 Diversification of Income and Employment: How Does Microfinance Affect Agriculture? 135 Introduction 135 Traditional Role of Institutional Finance in Agriculture 136 Recent Credit Initiatives in Agriculture 138 Descriptive Data Analysis 139 Summary 157 Annex 7A: Switching Regression Method 158 Notes 159 Bibliography 159 Chapter 8 Distributional Impacts 163 Introduction 163 Estimating Benefits Distribution: Do Resource Endowments Matter? 164 Who Are the Losers? 176 Summary 182 Annex 8A: Quantile Regression to Estimate the Distributional Impacts of Microfinance 183 Notes 185 Bibliography 186 Chapter 9 Effects of Noncredit Participation 189 Introduction 189 Evidence on the Role of Noncredit Services 190 Noncredit Services of MFIs in Bangladesh 191 Do Noncredit Inputs Matter in Enhancing Household Welfare? 193 Summary 205 Notes 207 Bibliography 207 Chapter 10 Does Microfinance Pay Off? 209 Introduction 209 Calculating the Costs of RNF Enterprise Operations 210 Analyzing Rates of Return: Production or Profit Function Approaches? 214 Constraints to Sector Expansion and Productivity Growth 220 Can Better Access to Finance Promote Rural Enterprise Growth? 230 Summary 232 Beyond Ending Poverty • http://dx.doi.org/10.1596/978-1-4648-0894-4 viii Contents Notes 233 Bibliography 234 Chapter 11 Beyond Ending Poverty 237 Introduction 237 Evolution of the Microfinance Sector 237 Does Microfinance Ultimately Matter? 238 Institutional Cost Effectiveness 239 Accomplishments for Members 240 Emerging Policy Concerns 243 Note 246 Bibliography 246 Appendix A Data Description 247 Household Survey Data 247 Program-Level Aggregate Time-Series Data 250 Institutional-Level Panel Data 250 Notes 251 Appendix B Alternative Models to Estimate the Impact of Microfinance 253 Quasi-Experimental Methods 253 Notes 256 Bibliography 256 Box 3.1 Snapshot of Microfinance Expansion in Bangladesh 38 Figures 2.1 Income Sources for Rural Households 14 2.2 Trend in Share of Nonfarm Income with Increasing Household Income 15 3.1 Growth Trend in Microfinance Membership, 1996–2010