Impact of Microfinance in Bangladesh

Microcredit defined as credit for the poor without collateral, has evolved mainly out of several experiments, notably that of Grameen Bank (GB), in the late seventies and took the shape of a formal institutional program when the bank was set up by the government in 1983. Historically, the poor did not have access to formal sources of credit like the cooperatives and agricultural and commercial banks, because, among other reasons, they could not offer collateral against credit from these sources. After Bangladesh came into being in 1971, a large number of experiments were undertaken by government agencies, NGOs and academics to evolve a development strategy for poverty alleviation. Some of these experiments including the GB and the government sponsored Small Farmer Development Project (SFDP), which were started in 1976, identified the provision of collateral free credit to the poor as a key factor for addressing the problem of poverty.

Since mid-eighties, a large number of studies have been conducted on the impact of microfinance program on poverty. The studies find that microfinance program has benefited the poor in more than one way. The program has improved their living standard through diversification and strengthening of their survival strategies, improving their security, providing access to assets and rights and increasing their self-respect, giving them choices and independence. The access to microfinancial services has enabled the poor to undertake diversified economic activities, which generate flow of income year round and thus strengthen the survival strategy of the poor. Without microfinancial services, security for the poor rural households would come from patron-client and mutual sharing and borrowing arrangements, which have weakened over the years. With microfinancial services, the poor households now own and command assets and savings which they can cash or use to meet contingencies without sacrificing their independence, security or peace of mind, by getting into debt. Microcredit borrowers, for example, were able to face the devastating floods of 1998 using their assets and savings. Microcredit borrowers can now depend substantially on their own assets and reserves to meet contingencies and do not have to depend on borrowings from patrons or moneylenders with conditions that had included usurious rates of interests, meeting obligations like free labor, supporting patrons in unjust local feuds and elections, etc. There is self-respect among the borrowers, which had previously been absent. Microfinance program has also empowered its beneficiaries, raised their social and political consciousness which is reflected, among others, in their increased participation in local government, national elections and social mobilization, activities like building community roads, running health programs and community schools.

Findings of the World Bank Study

A rapid impact assessment study conducted by the World Bank (1999) shows that the poor have benefited from the microfinance program of PKSF - Palli Karma-Sahayak Foundation - in several ways. It finds that (a) income has increased for 97.93% of the borrowers; (b) quality and quantity of food intake have improved for 88.59% of the borrowers; (c) clothing improvement has been reported by 87.85% of the borrowers; (d) housing conditions have been improved for 75.26% of borrowers; (f) sanitation condition has been improved for 68.74% of the borrowers; and (g) overall quality of life improvement has been reported by 94.96% of the borrowers.

The World Bank (1999) study also finds that land ownership of 28.5% borrowers has increased and they on average acquired 30.6 decimals of land, significant for a poor family. Ownership of houses with standard wall and CI roof has increased from 25.6% to 44.3% and houses having walls and roof with CI materials has increased from 7.3% to 36%. About 87% of the borrowers have a substantial accumulation of assets, through microcredit income-generating programs. Their net worth is about Tk. 26,794, which is significant for a poor family and self-evaluation of the borrowers on their family condition has been very positive. The number of families having food deficit (and other incidental expenses) has been reduced from 82.2% to 9.6% over a period of 5 to 6 years, 77.3% of the families have either adequate or better economic condition compared with 4.7%, prior to their involvement with the microfinance program of POs.

The microfinance program has demonstrated a great degree of resilience in coping, successfully, with the effects of the devastating floods of 1998. The program has in fact proved to be a very effective means of reviving the rural economy in the aftermath of floods, as seen in 1998.

Extracted from:The Microfinance Newsletter #8, March-June 2000,
published by: Credit and Development Forum.