Interim Report Submission On Impact of Microfinance Program on Poverty in Bangladesh

Submitted To: Ms Sadia Afroze Associate Professor Department of Accounting & Information Systems University of Dhaka

Submitted By: Ismail Hosen MBA 13th Batch BBA Roll No. 13037 MBA Roll No. 275 Department of Accounting & Information Systems University of Dhaka

Date of Submission: January 03, 2013

Outline of the report:

1. Introduction 2. Literature review 3. Materials and Methods 4. Descriptive analysis 5. Impact Analysis 6. Evaluation and findings 7. Conclusion

Executive Summary
This research tests whether microcredit offered by MFIs succeeded, from the perspectives of beneficiaries, in reducing the poverty of borrowers in poor areas in Madaripur, Bangladesh using the example of different Microfinance Institutions (MFIa) as case study. The data was gathered using a tailored questionnaire on sample of 52 beneficiaries. Data collected were analyzed using descriptive and inferential statistics. A linear regression model is used with the dependent variables as the difference in income and assets indices before and after acquiring the loan and a set of independent variables. Microfinance showed a positive effect on poverty reduction and

life betterment but with a small magnitude. The result revealed that majority of beneficiaries was poor and were in the active age group of between 21-42 years representing about 59.62%. Microfinance loan increases living standards at significant levels. Though the interest rates charged by the MFIs are very high (averagely 20.31%). It is highly recommended to have government supervisory entity sessions to all beneficiaries prior to approving loans requests. It is therefore, also recommended that policy should address issue for inadequate information access and high interest rates.

Introduction:
The microfinance sector in Bangladesh is one of the oldest and most mature. Some of the largest microfinance institutions in the world are Grameen Bank, BRAC, ASA, provide access to finance to nearly 20 million poor people here. On account of its pioneering role in developing a low cost model of microcredit delivery is known worldwide as the Grameen model-and in demonstrating its sustainability, Bangladesh has been referred to as th e birthplace of microfinance. With a population of 15.16 crores and density of 964 persons per square kilometer, Bangladesh is one of the densely populated countries in the world. While it is one of the poorest countries in the world, Bangladesh has made significant progress in recent decades; achieving an 81% increase in its Human Development Index since 1980. However, it still has a low ranking of 109 out of 135 countries and a composite score of just 0.497 using the revised 2011 version of the index. The financial system of Bangladesh is governed and regulated by the Bangladesh Bank and consists of state owned commercial, government-owned specialized development banks, domestic private commercial banks, and foreign banks. The other formal financial service providers are Non- Banking Financial Institutions, Microfinance Institutions and insurance companies. In addition, there are a large number of informal financial service providers such as moneylenders, pawnbrokers and Rotating Savings and Credit Associations. The internationally famous Grameen Bank is a special case, having been created under a customized ordinance. It is currently the largest provider of microfinance services in the country. Table 1.1 summarizes the financial system of Bangladesh, depicted in more detail in the figure attached to the page no.3. Microfinance in Bangladesh is overwhelmingly provided by NGO-MFIs with Grameen Bank being the only exception in terms of institutional type. Commercial banks have also initiated direct credit programs along with NGO-MFIs linked credit schemes, in order to alleviate poverty. Microfinance in Bangladesh is overwhelmingly provided by NGO-MFIs with Grameen Bank being the only exception in terms of institutional type. Commercial banks have also initiated direct credit programs along with NGO-MFI linked credit schemes, in order to alleviate poverty. Microfinance has grown tremendously in the past decade and is now practiced in some form in almost all regions of the world. Bangladeshs per capita Gross National Income (GNI) was $ 640 in mid-2010, ranked by the international Monetary Fund at 158 out of 182 countries. As per the World Development Indicators database of the World Bank, GNI per capita (at purchasing power parity) was $ 1620 in 2010.

Table1.1 summarizes the financial system of Bangladesh: Type Commercial Banks ownership Government Private Foreign Specialized Banks NBFI Government Government Private Foreign Microfinance Institutions Grameen Bank NGO-MFIs NGOs Private/Govt. Private Private Bangladesh Bank Micro-credit Regulatory Authority Not Under Regulation Bangladesh Bank Bangladesh Bank Regulated By Bangladesh Bank Number 4 39 9 4 1 15 13 Number 1 553 ~ 500

For the purpose of determining microfinance coverage, the total number of households in Bangladesh has calculated using an estimated household size of 5 persons resulting in 33 million households. Bangladesh Microfinance Statistics, 2009 indicates 27.05 million microfinance borrower accounts in the country at the end of 2009. Assuming every household below the poverty line is a potential microfinance borrower, the extent of microfinance coverage would be 22.0% of all households below the upper national poverty line. For each potential microfinance borrowing household in the country, there is an average of around 1.45 loans outstanding. Feedback from some MFIs managers, however, indicates an overstating of borrower accounts by around 15-20%, suggesting that loans per eligible client household are better estimated at 1.20 and the number of borrowers at around 18.5 million. The largest 3 organizations service for over 70% of the total microfinance portfolio in Bangladesh and 87% of the portfolio of the large 10 microfinance institutions. Figure 1.2 shows the largest three microfinance organization loans distributions.

Figure1.2 Distrbution of outstnding Portfolio, 2009 .

Other 13%

ASA 21% BRAC 29%

Grameen 37%

The microfinance industry has $2.72 billion of credit outstanding, which amounts to 7.33% of the $37.1 billion outstanding in the countrys entire financial system. Figure 1.3 shows the microfinance part of the total financial systems
Figure 1.3 Microfinance as part of the financial system

MF Portfolio 7% Bank Credit 7% 93%

These overall analyses give us the insight that the Microfinance sector provides us a very important phenomenon in access to financial services. The following part of this report will provide the study area of this paper on the ground of the previous discussion.

Chapter Two 2

Literature Review
The purpose of this chapter is to present the conceptual framework through which microfinance is considered as a poverty reduction tool. This chapter will also discuss the condition of microfinance in Bangladesh and will display the previous empirical studies in various developing countries and highlight the effectiveness of microfinance in reducing poverty in each country.

2.1 Conceptual Framework in Assessing Microfinance Effect on Poverty:

Theories developed in the context of development economics highlighted numerous factors affecting poverty. Many researchers agree that the major factors correlated with poverty are: large family size, low educational attainment, unemployment, underemployment (for example, part time workers who want to work full-time), low wages and the prevailing economic conditions in the labor market. According to the literature, a number of specific factors affect poverty in each country, depending on the conditions of the country. For example, in Uganda, as stated in Lawson, McKay and Okidi (2003), alcoholism, polygamy, large families, and illness were the leading causes of poverty. In Latin America, other factors proved to be the most important determinants of poverty, including rural underdevelopment and demographic composition complexity (Benito, 2000). In Bangladesh the main reasons of poverty are full and seasonal unemployment, natural disasters like flood, tornado, river erosion, drought etc, inflation, high birth date or large families, illness, illiteracy etc.

2.1.1. Poverty as a Multidimensional Concept:

Some researchers attempt to define poverty in order to find better approaches to combat it. For instance, poverty could be defined as an income level below a socially acceptable minimum. Poverty could be distinctive in terms of the severity. Montgomery and Weiss (2005) made a simple distinction between the long-term or chronic poor and those who temporarily fall into poverty as a result of adverse shock, known as transitory poor. Studies such as Weiss, Montgomery and Kurmanalieva (2003) argue that microfinance can help both types of poor come out of poverty since access to microfinance can fund, prolific activities that will increase income levels. This is based on the notion that poverty is typically interpreted as a lack of access by poor households to the assets required for higher standard of income or welfare (Weiss, Montgomery and Kurmanalieva, 2003). Poverty has traditionally been defined as one dimensional, where only income and consumption count for measuring the intensity of poverty. The study of poverty started with the works of Booth (1982) and Rowntree (1901), who were th fjirst to introduce the economic concept of poverty, combined with that of the poverty line and the head count ration on the basis of the basic needs approach (Fusco, 2003).

It was not until the 1970s that poverty started being defined by many researchers as a multidimensional concept. In fact, poverty has several dimensions, including insufficient or poor quality nutrition, poor health, limited access to education, and low levels of participation in decision making. This multivariate direction includes the functioning and capabilities approach introduced by Sen (1979), and the UNDP human poverty index. Moreover, Massoumi (1986), Case and Deaton (2002), and Deutsch and Silber (2005) argue that poverty is a multidimensional phenomenon. More studies attempted to measure the relative importance of specific dimensions in reducing poverty. The reason why a certain dimension might matter is that it has instrumental power. That is, the dimension is expected to contribute effectively to the reduction of one or more other dimensions of poverty (Alkire, 2008). For example, studies proved the poverty rate has decreased among football players, and then football playing skills might be included as a multidimensional measure of poverty. An empirical study conducted in rural Brazil concluded that poverty has two dimensions; income and educational attainment. The study observed that the drop in poverty in poverty levels is higher for people with higher education (Bourguignon and Chakravarty, 2003). Therefore, educational attainment should be included as a multidimensional measure of poverty in Brazil. Each country has its own dimensions used in measuring poverty reduction based on its historical, cultural, political, economic, and environmental status. Many researchers in all countries came up with numerous dimensions, but these papers invariably aggregate the multiple measures of well-being into a one- dimensional index, essentially returning to a univariate analysis. The bestknown example is the Human Development Index (HDI) of the UNDP (1990), which uses a weighted average of life expectancy, literacy, and GDP per capita for a population, as well as other dimensions (Duclos, Sahn and Younger (2008). In order to avoid the possibility that two equally valid rules for aggregating across deveral dimensions of well-being could lead to contradictory conclusions regarding which groups have higher poverty, some studies measure poverty reduction through certain dimensions that are not aggregated into one-dimension, such researchers include Duclos, Sahn, and Younger (2008), in addition to many others who have tackled microfinance as poverty reduction tool. There are some standard definitions of poverty. The deficiency of income to satisfy basic needs is by far the most widely used definition of poverty status. Income poverty is determined by comparison of household income to a poverty line estimated using a normative food items. The absolute poverty line is set at the level of the expenditure needed to provide a balanced minimum diet of 2110 calories with a 30 percent (of poverty level income) allowance for non-food basic needs (Hossain, 2009).

The definition of poverty used in this research is that of the World Bank which implies that anybody who earns $2 per day or less is considered poor. Before testing the effectiveness of microfinance, it is important to highlight the condition and trend of poverty in Bangladesh.

2.2. Trends in poverty & asset Distribution in rural Bangladesh:

Past Studies have revealed that, after being inflexible for twenty years since independence of Bangladesh in 1971, overall poverty has deteriorated since 1990, and that the rate of deterioration has continued for the next five years. An estimate of recent study has revealed that within the next five years, the procedure of increasing poverty reduction is nonstop and maybe somewhat strengthened. After looking at the poverty and its dynamics in Bangladesh we can now turn to the discussion of microfinance. In the following subsections the definitions, characteristics and historical overview of microfinance are discussed.

2.3. Overview of microfinance and microcredit:

Microfinance is referred to as the provision which provides financial services to low- income and poor people who are lacking of access to financial services. Microfinance is the opportunity for poor and lower income people to get financial services according to Otero (1999, p.8). Financial services mainly consists savings and credit (Ledgerwood, 1999). Colombet & Schreiner (2010, p.339) described microfinance as a collection of small loans and deposits for the group of person who are deprived of financial services. It can be said microfinance is a provision that provides services to those poor and lower income group people who are living in rural areas and are deprived of formal financial services from financial institutions. As said by Maanen (2004), Microfinance is providing banking to the unbankables, taking crucial financial services to the millions of people who are not eligible for accessing under the umbrella of formal financial institutions. He said banks are not for people having money but for people having money. Poor people do not have access to financial services because they do not meet the minimum standard of creditworthiness due to lack of security, stable job, steady flow of income and provable loan history. Microfinance has eliminated the wall of creditworthiness by its credit design and ensured the access to financial services by the poor. It has helped poor people to set up own venture and generate income from that venture, thus helped them to increase wealth and

go out of poverty. Besides financial services it improves the lifestyle of poor by providing education and fulfilling other basic needs. Microfinance is based on the ground that poor have unused or underused skills. They are poor not for their lack of skills but lack of the opportunity to use their skills (Yunus, 2006). Yunus (2003) said that charity leads to a longer poverty and it is not the solution to the poverty. Only the measure to unleash the creativity and prospect inheriting in the vein of every person is the proper answer to the poverty. Following this inspiring vision of Dr. Muhammad Yunus, now-adays microfinance has become a movement against poverty thats objective is to ensure the access to financial services by the people by providing a wide range for services such as savings, credit, insurance etc (Christen et.el., 2004).

2.4. Difference between Microcredit and Microfinance:

Microcredit and microfinance is almost same in their names which are used interchangeably where there is a difference between microcredit and microfinance. According to Sinha (1998, p.2), microcredit means to provide loan in small amount but where no formal institutions are involved on the other hand microfinance refers to small loan which is provided by NGOs and MFIs or any formal financial institutions. Okiocredit, (2005) identified microcredit and microfinance that microcredit involves with supplying loan to lower income group or poor on the other hand microfinance refers to provide loan to the poor additionally other financial services such as to take deposit, provide payment services , collect bills, insurance and pension services etc.

2.5. The History of Microfinance:

Microcredit has an old and long history. Formal microcredit institutions are known for several decades but the history of informal micro lending is old. One of the oldest micro-credit institutions that provided small loans to poor without any collateral was established by Irish nationalist Joanthan Swift (global vision, 2006). He initiated this idea in 1700s. in the 1800s many other small financial institutions were set up which were more likely savings and credit unions and cooperative institutions. These types of cooperative credit institutions were spread in rapidly in Germany in 1870s and spread in other European countries in later decades (global vision 2006). In the early 1900s this cooperative model was spread through Indonesia and Latin America. These new financial institutions were targeted to increase the rural commercialization and to mobilize savings in the rural areas. But these cooperative banks and financial institutions were owned by the rich and government not by the poor. Thus ultimately many were targeted to earn profit and many became inefficient got shut down.

In the 1950s to 1970s many agricultural lending institutions were set up in many countries by respective governments with the help of donors. These institutions focused mainly on small farmers in the expectation of increasing productivity and farmers income. But these supply led institutions failed to achieve their objectives due to inefficiency in disbursing and recovering the loans. As a result they faced immense attrition in their capital base and became failed organizations. In the mid 1970s Dr. Muhammad Yunus who was a teacher of University of Chittagong in Bangladesh innovated a new village banking model. At first he applied it on the people of a village name Jobra near the University of Chittagong. This pilot project got massive success. But he failed to attract formal financial institutions to undertake his new village banking scheme due to the large operating cost. At last, due to his relentless effort Muhammad Yunus established Grameen Bank, the first microfinance institution in Bankgladesh, with the help of government and dondor agencies (global vision, 2006). Following the track of Grameen Bank many other giant MFIs (e.g. BRAC, ASA, Proshika, etc.) have been established in Bangladesh. After the development of Grameen Bank, large scale- outreach could be provided by microcredit profitably. The 1990s saw accelerated growth in the now days microfinance institutions (Robinson, 2001, p.54). Dichter (1999) declared 1990s as the microfinance decade. In now a days microfinance become a growing industry said by Robinson (2001). By the development of micro finance institutions, microfinance concept is now become wider and a number of formal financial institutions are developed which are responsible for providing loan to lower income people and also to provide loan and other financial services (MIX, 2005). Another successful microfinance Institution is Bank Rakyat Indonesia (BRI). It was established in the mid-1980s. Now it is probably the largest single MFI in the world. It serves more than 30 million members all over Indonesia (Jakarta post, 2011). After the development of Grameen Bank and BRI, large scale-outreach could be provided by microcredit profitably. The 1990s saw accelerated growth in the number of microfinance institutions (Robinson, 2001, p.54). In this decade MFIs introduced many microproducts to serve microenterprises and poor households. After 1990s many commercial banks have also started microfinance products in many countries. Dichter (1999) declared 1990s as the microfinance decade (Dichter, 1999, p.12). In now days microfinance become a growing industry said by Robinson (2001). By the development of microfinance institutions, microfinance concept is now become wider and a number of formal financial institutions are developed which are responsible for providing loan to lower income people and also provide loan and other financial services (MIX, 2005). Microfinance has spread very widely all over the world. According to Microcredit summit campaign report 2011, MFIs all over the globe have

reached to about 190 million clients of whom about 128 million are the poorest. Today developed countries also considering microfinance as the strategy of improving life standard of poor.

2.5. Model of microfinance interventions:

It has already been mentioned the main problems of formal financial institutions and informal credit sources in the previous part. These types of financial institutions are not designed to supply financial services to poor. There are many barriers to entry these financial institutions by the poor. The Grameen Bank designed a new kind of organization that serves the poor and broke the all barriers to the access to the financial institutions by the poor. The Grameen Bank model is well known but I am describing it here due to the detailed understanding of the way microfinance help poor. In a study on the state of microfinance in Bangladesh Alamgir (2009) has described the basic principles of Grameen approach to break the barriers to access to credit by the poor. These are given below: 1. Poor people, especially poor women are targeted as the member of the MFI. Here, the clients having land less than 0.5 acre are accepted as member; 2. Women clients who repay loans in due time, and use money for generating income and use generated income to develop the living standard are accepted here; 3. Clients are clustered as the group which consists of five persons and six to ten groups are organized to form a centre. A supervisor i.e., bank staff visits each centre minimum once a week for making transactions; 4. There is no collateral is required for the loan, but group members are responsible of repayment; 5. Loans are given in small amount and repayments are also taken in small weekly installments. 6. Borrowers need not to come to the bank instead bank will reach the banking services at the door of poor. Banks employees will collect installments, disburse loans and supervise the borrowers by going to centers; 7. All administrative approaches are simplified to match with the poor. 8. To eliminate corruption all transactions are completed in public.

2.6.1. The Grameen group- based solidarity model:

The most widely used lending technology is the group based system introduced by Grameen Bank. Guzman and Berenbach (1994) said that groups are formed for taking loan becomes the peer group where each group is formed with four to seven members. The group members meet once a week to take loans, deposits, and savings and repay loans. Loans are given for one year, where repayments are taken in equal installments. Each installment contains both principal and interest. After repayment of one loan the borrower can take another loan in higher amount.

Collectively all members of the group are treated as a guarantor, and the successful repayment by all group members helps to access the subsequent loans. Generally all payments paid on weekly basis (Ledgerwood, 1999). By making each member as the guarantor of each other such solidarity groups decline the rate of default of loan repayment for such microfinance institutes like Grameen bank (Guzman and Berenbach, 1994). This group based model is so effective that most of the MFIs use this approach. At present, almost 33 million members do their transaction in this system (Alamgir, 2009). Though this system has some criticisms about its rigidity in payment system, it was proved to be most effective. 2.6.2. Self-help group or Village Banking Model: Village Banks are formed by NGOs which provide opportunity for access to financial services, motivate their members to deposit their savings and form self-help groups which are community managed credit and savings associations (Holt, 1994). Since the mid-1980s we can found their existence. They generally have 25-50 members who want to improve their living condition by self-employment activities and have very little income. The Bank run by these members, the members also elect own officers, set laws by their own, give loan to the people and provide their services by making payments (Grameen Bank, 2000). Loan recovery rate is high due to moral support that each group promise behind each loan published on a report in 2005 in Global Development Research Centre. Main source of fund f village banks come from sponsoring MFIs. To make a collective guarantee all members sign to a loan agreement with the village bank. Usually Twenty percent of the loan amount of every cycle is offered to save by the members (Ledgerwood, 1999). New loans and income generating activities are financed by the savings of the members which is tied to the loan amounts. Members pay no interest on savings and the village bank share a profit from its relending activities to its members. Women are the main target of many village banks, Female participation in the village banks will increase social status and household bargaining power is expected by the model said by Holt (1994, p.158). 2.6.3. Individual Lending Systems: Another lending methodology used by MFIs is individual lending method. This method aims at increasing flexibility and imposing more importance on meeting individual loan needs. Where group based systems is a model used for all, individual technique offers loans and saving services base on the individual demands of clients. In this model borrowers have flexibility in terms of borrowing amount, repayment schedule, frequency of savings, and the duration of loan.

ASA and BRAC have introduced this of lending method for microenterprises, but customers dont get full flexibility in terms of duration of loan (Alamgir, 2009). 2.7. Microfinance in Bangladesh: After the introduction of Microfinance in Bangladesh in 1970s, microfinance sector grew very rapidly in that country. MFIs in Bangladesh have been delivering financial services to the poor who had no access to these services earlier. Previously the default rate of small agricultural loan was very high in Bangladesh. The introduction of group based system of MFIs has decreased the default rate to a very low level. The poor now have the access to a collateral free credit that enable income using micro credit and reduce their poverty. Microfinance is a comparatively new term in Bangladesh. People are more accustomed with the term Microcredit. The basic difference between microcredit and microfinance was discussed earlier. In short word, microcredit refers only lending and borrowing in small amount, while microfinance is an umbrella term that covers savings, microcredit, micro insurance and even remittance services in micro level (Alamgir, 2009). Besides focusing on the poor, micro financing provides services to non-poor small farmers and micro entrepreneurs. 2.7.1. Current Features of Microfinance Sector in Bangladesh: Microfinance sector in Bangladesh has passed a long way. Over this time the initial features and principals followed MFIs have changed by a small degree. Now microfinance programs have following common features: MFIs target women as the main recipients of their services although they have many male members; Though commercial banks and many MFIs provide loan to individual clients, groupbased systems is still the dominating methodology microfinance lending. In the beginning of MFI sector in Bangladesh group members have to take liability for any default by any group member. But now-a-says MFIs use group-based model as a low cost administrative method and liability is borne by individual client not the group; Now NGOs dominate the microfinance sector, which provide financial services to poor along with their other development services. These NGOs are known as NGO-MFIs (Alamgir, 2009); Besides the poor MFIs are offering financial services to near-poor people, that ensures their long term financial viability through diversification. Through the diversification strategy NGO-MFIs are transforming into permanent financial service providers for poor and near-poor.

2.7.2. Microfinance outreach in Bangladesh:

At the end of 2008 MFIs have served about 33 million members of which 26.78 million or 81.1% was borrowers (Microfinance Statistics, 2008). This estimate includes multiple memberships or overlapping. Total 14,441 branches of over 700 MFIs serves these clients. The six of the overall which the giant three (Grameen, BRAC and ASA) accounted for 79.26%. About 700 small MFIs served the rest 20.47%. This statistics indicate that microfinance sector in Bangladesh is heavily concentrated around these large three MFIs. The reason behind this concentration is the resource and management constraint of these smaller institutions. Though economic evaluation of micro-finance policy in Bangladesh is not hopeful as predictable, socioeconomic benefits of micro-finance programs reveals micro-finance as a promising device for poverty reduction. Findings differ from one study to another because of the differences in impact evaluation methodologies used but these studies are concluded in the context of providing that microfinance facilities to the poor, although all clients may not benefited uniformly. One study of Grameen Bank revealed that Grameen Bank provide facilities to the poor women in terms of income generation, employment and promotion of social indicators (Hossain 1988). Other BIDS and non BIDS studies also indicate that micro-finance operation in Bangladesh helps the poor people (e.g., Rahman 1996; Riley, Schuler, and Hashemi, 1996; Hashemi and Schuler 1994). These studies indicate correlation between micro-finance programs and their provided benefits, but do not indicate whether these programs really subjects to creating such benefits to the participants.

2.8 Microfinance and its impact on development:

Besides providing credit to the poor for fighting with poverty on individual level, microfinance has also the responsibility to fight against poverty in institutional level (Otero, 1999), microfinance institutions have evolved as the solution to the problem of access to the financial services by the poor. But to reduce the poverty in Bangladesh MFIs need to address the financial access gap in a sustainable manner. Through this MFIs can become an inseparable part of the financial sector of Bangladesh as it has done in some extent. Studies show that microfinance plays important role in development of the livelihood and economy. Microfinance plays following roles in development (UNCDF, 200): Microfinance helps poor people meet fulfill essential needs Provides protection against risks and vulnerability. Improves economic condition of households Increase women empowerment through program participation, thus encourage gender equality.

Otero (1999, p .10) referred microfinance as the mechanism that fight against poverty. She stated that microfinance makes a big opportunity for the poor to access to productive capital. Such capital becomes human capital and social capital. Human capita is created through training and education as well as social capital is created through getting the accessibility of formal institution that helps to remove poverty. Material capital support to a poor man or women build strong sense of dignity and it also give strength to a poor people for involving in the economic and social service. (Otero, 1999). According to Otero (1999) microfinance motto is not only the support of combating poverty in a certain level by providing capital but also it is effective in industrial sector. Micro finance can provide service to the poor as an informal way instead of formal financial institutions where their services are unnoticed to institutional banking format. Littlefield and Rosenberg (2004) said that MFIs have formed to address the market failure; market fails because the poor are usually ignored in the financial service sector. By searching out the gap in the market an MFI can increase the number of poor people in the market and besides MFIs now turn into formal financial institution and they can fund their lending portfolios by involving capital market Otero, 1999). Not so ago, critics like Littlefield, Murduch and Hashemi (2003), Simanowitz and Brody (2004) and the IMF (2005) have given their comment on the contribution of microfinance in acquiring the Millennium Development Goals. Simanowitz ans Brody (2004, p.1) stated that to achieve MDGs microfinance can play a vital role and most of the poor people can be benefited if the microfinance system can be established as a global financial system. Littlefield et.al. (2003) stated Microfinance is a critical contextual factor with strong impact on the achievements of the MDGs microfinance has no other competitor among the development interventions: it can provide social benefits continuously, permanently and on a large scale. Different research and observation proved that how microfinance eradicates poverty, accelerate education, well health facilities and empower women (2003).

2.9. The Debate about the Effectiveness of Microfinance:

Finding strategies to alleviate poverty is of great importance to policy makers. Among these strategies, microfinance has taken an advanced rank because it helps to not exclude the poor from their right to access loans. Nonetheless, many poor people have great difficulty accessing microfinance. Montgomery and Weiss (2005) stated that microfinance may have positive effects on poverty but it is not the magic formula in reaching the poor. Caskey et al, (2006), for instance, said that about two thirds of low-income households living the Metropolitan area of Mexico City were Unbanked, and among those banked, only a small percentage had access to credit. Measuring the effect of microfinance on poverty reduction will have good policy implications in terms of facilitating access to microfinance for the poor, should microfinance prove to have a positive effect (Nino-Zarazua and Mosley, 2009).

There has long been a debate about the effectiveness of microfinance. While some perceive it as a good technique to decrease poverty rates, others do not. Microfinance has many advantages. It accepts giving loans to the very poor without requiring collateral and being replaced by group lending as well as the provision of some non financial services such as business development, in order to help borrowers achieve the best use of the loans through teaching them feasibility studies techniques, marketing, budgeting, etc. moreover, contrary to regular employment opportunities, microfinance offers employment opportunities, with flexible working hours that could be considered a big advantage women conversely, according to Islam (2007 and 2009), there are some disadvantages to microfinance, including the imperfect information that results in borrowers not knowing where to apply for loans and lenders not knowing much about potential borrowers; institutional underdevelopment in the sense of literacy or numeracy which results in institutions that are too weak to support growth of good services; the ability to reach the extreme poor; limited macroeconomic impact propensity to charge high interest rates; and very low repayment rates. The existence of family enterprises in most cases is considered by some economists to be a disadvantage as well. Previous studies show that there are many practices originating from microfinance. For instance, there are groups called self-help groups (SHGs) which are small, informal, homogeneous, and have about 20 members. Homogeneity ensures that the members do not have conflicting interests and can freely participate in the activities. Those members have poor risk-taking ability, no collateral to offer, and limited earning opportunities. It is observed that the repayment rates of such systems are good in relatively remote communities and even in communities that are likely to have higher than average rates of poverty. It was also noticed that womens empowerment (Vatta, 2003). It is worth mentioning that microcredit programs do not merely offer monetary loans to buy physical inputs, but they provide noncredit services and incentives (BDS) as well. These noncredit aspects may be an important element in the success of microcredit services programs is difficult to measure, they may not be properly valued (McKernan, 2002). Montgomery and Weiss (2005) in their paper have discussed the prospect of microfinance eradicating poverty and the methodological issues related to assessing its success in poverty alleviation, or at least decreasing its percent compared to before obtaining microcredit. They recommended giving more attention to poor outreach, since the poor face difficulties accessing microcredit represented in the necessity of introducing collaterals or assets covering loan microcredit in alleviating poverty is the main objectives of this thesis. One of the solutions provided for addressing unemployment was to facilitate microcredit for the Poor so they could establish their own micro and small businesses. In sum, the above paragraph highlights the importance of adopting a multidimensional definition of poverty that includes literacy rates, health conditions, the basic needs indictors such as food, quality of potable water, and clothing, in addition to the monetary income and non-monetary assets.

2.10. Studies Questioning the Impact of Microfinance:

Other studies disagree with these claims and argue that microfinance either has no effect in alleviating poverty or only a slight effect. Morduch (1998) used the BIDS World Bank survey data with a difference-in-difference method. He concluded that microfinance effects are either non-existent or very small. Others have criticized microfinance and accused it of being no use in reducing poverty rates. For example, Mallick (2002) claimed that microfinance levels did not decrease in Bangladesh, but Hossain (2002) refused this claim and stated that microfinance success should not be ignored. Some argue that most MFIs have low repayment rates which results in their inability to sustain. Failure to meet a repayment deadline results in an immediate loss of privilege of future loans (Modrduch 1999:1582). Roodman and Morduch (2009) revisited the studies carried out in Bangladesh and they used Two-Stage Least Squares (2STL) regressions and Discovered that lives of the borrowers after 30 years of microfinance did not improve. A study by Menon (2006) draws her sample from eight Grameen thanas Grameen is the only program that operates in these thanas-and estimates the impacts of consumption smoothing by nonlinear least squares. The results show that although microcredit helps improve the recipients ability to smooth seasonal shocks, its effect diminishes over time and it has virtually no impact after four years of participation.

In attempting to solve the problem of MFIs sustainability, Hulme and Arun (2009) argue that the concept and practice of microfinance have changed drastically over the last decade and the microfinance sector is increasingly implementing a financial systems approach. This is done through either operating on commercial lines or by steadily reducing reliance on interest rate subsidies, as well as aid agency financial support. Ricardo N. Bebczuk (2009) in his paper assessed the access of micro-small medium enterprises to credit in Guatemala and Nicaragua using national household surveys conducted in 2006 and World Bank Investment Climate surveys. Based on the regression conduced, the number of MSMEs that have an unmet demand for credit is significantly lower than is usually thought. About 63% of micro and small enterprises owners said there is no need for a loan and 23.9% attributed their refusal to apply for a loan to the high interest rate, while 13% were in favor of applying for loans. It is worth mentioning the selection bias problems that many studies did not consider. This bias, arising from the non random placement and self selection into the program, may lead to invalid impact estimates. Islam (2007) attempted to find a solution for this problem by suggesting parametric and non-parametric strategies. He employed the instrumental variable (IV estimator) approach where he used eligibility rule for receiving the loan as an instrument for participation in microfinance. He interpreted the IV estimator as the local average treatment on those who are

inclined to participate only because of the instrument. This approach was firstly introduced by Imbens and Angrist (1994). Islam (2007) found that the effect of microfinance on household consumption expenditure was not strong. He did not find statistically significant effects in most cases. However, he concluded that the IV estimates of program impact are larger in the consumption expenditure of the relatively poor participating households. None of the estimated coefficients of PSM estimates are statistically significant, and they have lower magnitude than the corresponding IV estimates. His overall results indicate that the positive effects are found more male than female borrowers. This result contradicts Pitt and Khandker (1998), who found stronger positive effects for women than men borrowers.

Chapter 3 Methodology
This study applies the mixed methods approach which involves using a quantitative research followed by a qualitative one. The qualitative research is conducted in order to validate results found in the quantitative research. The main objectives of my study are to find out both the short term and long term effect of microfinance on poverty reduction. The short term effect of microfinance will be examined by testing any changes in the income and the long term effect will be studied by testing the change in the assets of households. This study will compute the difference in the income and assets before and after program participation and will find out whether the change in the household income and assets is due to microfinance. However, since there was not available data for the beneficiaries status before the loan, the data were collected at one point in time depending on the Peoples perceptions. Most of the studies often try to compare the status before and after microcredit programs to estimate their impact on individuals (before-after comparison). However, in most cases, this does not provide reliable estimates because other factors like macroeconomic shocks can affect the post-treatment outcome. In other words, this approach fails to separate the impact of microfinance from the time trend that affects the result (Kono & Takahasal, 2010). Therefore, this study measures how clients perceive microfinance loan. The analysis on the data collected from the designed questionnaire survey will be conducted as follows. Firstly, descriptive statistics will be calculated on the demographic characteristics of the whole sample. In this part of analysis, the demographic conditions of survey participants will be described. Secondly, the income, expenses, assets and loan of participants will be discussed. In this part, simple statistical tools like averaging, count and standard deviation are used. Here, whether any change in the economic condition of participants occurred after joining in the microfinance program will be analyzed simply. It the third stage the qualitative analysis was done based on the answers found in the qualitative part of the questionnaire survey. The data found in this part of survey was analyzed by counting the frequencies of each of the answers of each of the questions. the change in their income and wealth due to the

In the economic analysis part, two linear regression models will be constructed with the dependent variables income and assets differentials. The first model measures the impact of

explanatory variables on the income (i.e. changes in the income). By doing so, this model will measure the short term impact of microfinance, that means whether microfinance increase the income of borrowers. The second model measures the impact of explanatory variables on the assets (i.e. changes in the assets). This model will measure the long term effect of microfinance or whether microfinance increases the asset base of borrowers and in what extent.

Variables
For both short term and long term impact analysis, same independent variables have been used. According to theory, the explanatory variables that are related to making microfinance effective in reducing poverty are gender, age, at the time of the loan, level of education, total number family members, amount of the loan, productivity of workers, and training given to borrowers. In the sample used in this research, no participants have taken any training from the MFIs and no data is available on the productivity of workers. So, some new models have been used for the variables. The variables used in the model contain variables describing the demographic condition of household and the variables of describing the microfinance borrowing condition and the financial conditions of borrowers. The rationale behind using the demographic variables is to find out impact of other variables except microfinance and financial variables. Financial condition of a household may change due to some important variables like education, age of the borrower or household head, marital status of the participant, number of household members etc. The financial and loan variables also have important effect on the households. Thus we have used the assets before joining to the microfinance program, cumulative amount of the loan, the length of membership and the number of times of borrowing as explanatory variables.

Both the explanatory and explained variables used in the analysis are listed in the following table: Independent Variables name Income Differentials Assets differentials Symbol Dependent Symbol Symbol name APi Ehi FMi Asi Sli LAi MLi BTi

Symbol name Variables name Yi Ai Age of participant Highest education in the household Number of family members Starting Assets of the respondent Starting Income of Borrower Amount of loan Length of membership Number of Times of borrowing

Table 3.1 List of Regressed Variables

The model
Based on the above variables and objectives the equations of the model are constructed as follows: For measuring the short term effect of microfinance following equation is used: Yi=+1APi+2Ehi+3FMi+4ASi+5Lai+6BTi+ei Where, =constant =coefficients ei=Error term Other variables are discussed in the above table. For measuring the long term effect following equation is used: Ai= +1APi+2Ehi+3FMi+4SLi+5Lai+6BTi+ei

The equation 1 and 2 are almost alike. Only one independent variable is replaced. Before participation assets (ASi) is replaced with before participation income (SLi). The dependent variable of changes in income (Yi) is replaced with changes in assets (Ai).

Data Sets
In order to run descriptive analysis and impact analysis, data sets are created according to the serial of questionnaires. So, here, total 55 variables under 7 data heads. The 7 data heads are: 1. Introduction Data (10 variables) 2. Loan Data (8 variables) 3. Income Data (3 variables) 4. Expense Data (6 variables) 5. Asset Data (14 variables ) 6. Bank Data (6 variable) & 7. Evaluative Data (8 Variables) Each and every variable contains total 55 observations. The following chapter will provide descriptive and impact analysis based on these data sets.

Chapter 6 will summarize the findings and give some evaluation information based on evaluative data set.

Full list of data sets and variables are given in Annex I and II.

Chapter 4 Descriptive Analysis

The data sources for this section were from the panel data of the institute of Microfinance. A sample of 55 beneficiaries has been chosen using a simple random sample technique from a population of 5000 beneficiaries of Grameen, ASA and Proshika from Madaripur Area. However, the randomness was implemented within investment purposes. Beneficiaries who have used the funds in buying consumption goods also included in the sample. This is to ensure that the impact is tested on those who took the funds in their own betterment. Statistically, this is considered a selection bias but it is essential in order to exclude irrelevant observations.

Socio-economic characteristics:
This section collects general information about the borrowers such as gender, his/her age and level of education, following table shows the composition of the sample and the population according the introduction data:

Variable Fm_mem Fm_boy Fm_girl Age_r Age_hh

Observations 55 55 55 55 54

Mean 6.461538 3.134615 3.326923 43.63462 48.43137

Std.Dev. 2.796788 1.657175 1.779195 13.94531 14.64548

Min 2 1 1 22 25

Max 15 8 8 78 80

Table4.1 Summary of Socio-economic Statistics

Our analysis shows that, of the 55 observations minimum numbers of family members is 2 and maximum number is 15 with a mean of 6.46 though our data revealed that 30.77% of the family consists of 3 members. On the other hand, of the 55 observations minimum number male members is 1 and maximum number is 8 with a mean of 3.13 in the observed families, though our data revealed that 25% of the family consists of 4 male members.

Besides, of the 55 observations minimum numbers of female members is 1 and maximum number is 8 with a mean of 3.32 in the observed families, though our data revealed that 32.69% of the family consists of 2 female members. Data in table 4.1 showed that majority of the respondents (59.62%) aged between 21 and 42 years, while those of 27 to 42 years was represented by 50%. The age group of 25 to 45 year was corresponded to the active/working population (80.68%). Of the 55 observations minimum age of the respondents is 22 and maximum age of the respondents is 78 with a mean of 43.63 in the observed families. On the other hand, of the 55 observations minimum age of the head of the respondents household is 25 and maximum age of the head of the respondent household is 80 with a mean of 48.43 in the observed families.

The following table shows the marital status of the respondents according to the introduction data: Marital Status Frequency 1 2 3 Total 45 3 4 52 Percent 86.54 5.77 7.69 100.00 Cumulative 86.54 92.31 100.00

Table 4.2: Marital Status of the Respondents

Here 1 represents married, 2 represents unmarried and 3 represents widowed. So it is seen that 86.54% of the beneficiaries are married. Educational level is another important yardstick to assess the poverty status (Salvia, 2007). Distribution of respondents by level of education also revealed that all are not educated and had one form of formal or informal education (adult/ Islamic). On the basis of education, the table (4.3) showed that majority of the respondents are either illiterate 53.85%, or have passed up to class 5, 23.08%.

Education of the Respondents: Frequencies 0 1 2 3 4 Total 28 12 4 5 3 55 Percent 53.85 23.08 7.69 9.62 5.77 100.00 Cum. 53.85 76.92 84.62 94.23 100.00

Table 4.3 Educational level of the Respondents Here 0 represents illiterate, 1 represents upto class 5, 2 represents upto class 8, 3 represents upto S.S.C and 4 represents upto H.S.C. So, it is seen that 53.85% of the beneficiaries are illiterate.

Loan and Interest:

This section collects loan information about the borrower such as interests, borrowed amounts frequency etc; following table shows the composition of the sample and the population according to the loan data: Variable Mem_tim Intr Time Amount Oth_amount Observations 55 55 55 55 25 Mean 79.15385 20.30827 7.288462 68567.31 47440 Min 16 18.75 2 12000 0 Max 185 27 16 400000 200000

Table: Loan status of the Respondents Of the 52 observations minimum duration of the respondent in any MFIs is 16 months and maximum duration of the respondents in any MFIs is 185 months with a mean of 79.15 months within the observed respondents. I found very high interest rates charged by the MFIs. Of the 52 observations minimum Interest rate charged by the MFIs is 18.75% and maximum interest charged by the MFIs is 27.00% with a mean of 20.31% within the observed respondents.

Interest Rate 18.75 19 23.56 27 Total

Frequencies 29 8 13 2 55

Percent 55.77 15.38 25.00 3.85 100.00

Cum. 55.77 71.15 96.15 100.00

Table4.5 Loan status of the respondents

The following table shows that 55.77% (most) charges 18.75% interest rate to the respondents. Of the 55 observations minimum frequency of the respondents to take loan from any MFIs is 2 times and maximum frequency of the respondents to take loan from any MFIs is 16 times with a mean of 7.29 times within observed respondents. On the other hand, of the 55 observations minimum amount of money the respondents take as loan from any MFIs is total 12000 taka and maximum amount of money the respondents take as loan from any MFIs is total 400000 taka with a mean of 68567 taka within the observed respondents. Income Information This section includes questions about the income standards status of borrowers before and after getting the loans. Questions collecting data about monthly income of borrowers before and after getting the loans will provide good indicators about the standards of living. Variable Inc_avg_b Inc_avg_a Obs 55 55 Mean 60204.4 89267.54 Std.Dev. 22198.26 42605.54 Min 27880 34200 Max 132400 240000

Table 4.6 summary of income Statistics

The table (4.6) shows that, of the 55 observations minimum yearly income of borrowers before getting the loans was 27880 taka and maximum yearly income of borrowers before getting the loans was 132400 taka with a mean of 60204 taka yearly within the respondents. Besides, the table 4.6 shows that, of the 55 observations minimum yearly income of borrowers after getting the loans was 34200 taka and maximum yearly income of borrowers after getting the loans was 240000 taka with a mean of 89268 taka yearly within the observed respondents. This research also reveals that, maximum borrowers are rickshaw puller (17.21%), and some of them are farmers (11.54%) and some of them are doing jobs (11.54%).

Impact Analysis
In the 1970s, three out of four Bangladeshis lived in poverty and the country was considered a test case for development. Rapid population growth, frequent natural disasters, and low economic growth throughout the 1980s suggested that a large number of households would remain trapped in chronic poverty. Defying this outlook, Bangladesh began experiencing more sustained economic growth since the 1990s, which was accompanied by impressive poverty reduction. For example, in 1991-92, about 60% of the population was below the poverty line and around 50% was below the extreme poverty line. By 2005, those figures had gone down to 40% and 25% respectively. The Bangladesh economy began experiencing structural changes in the 1990s following trade liberalization and domestic market reforms. In urban areas, private sector growth and employment were spurred by rapid growth in garments exports while rural areas benefited from

the deregulation of agriculture markets, boosting agricultural production. At the same time, relatively higher paying rural non-farm opportunities increased and the labor force slowly began to shift away from agriculture. Two well known studies assess short and medium-term microfinance impacts from the borrowers' point of view, using repeated household surveys carried out in rural Bangladesh. Using nationally representative data, their findings suggest that poverty reduction among the borrowers due to microfinance is 1.6 percentage points per year. Moreover, microfinance programs have spillover effects on the non-borrowers -- their poverty level goes down by 0.3 percentage point a year. Economic Impacts of Microfinance: (a) Income The 1998 survey found the average annual income of participant households to be higher than that of the non-participants. Self-employment activities had more than 50% contribution to total income for the participants as against 43 percent in case of non-participants. The second BIDS survey suggests that nominal household income increased by 19 percent in program villages and by only 13.5 percent in control villages. Compared to non-participants the participant households were better able to cope with flood, sustain their income, achieve higher purchasing power and consumption level. (b) Food Security The BIDS study finds the program participants, due to greater access to sharecropping, had better food security and about 26 percent of rice consumption out of own production (after sale), which was also marginally higher than the non-participants. (c) Wage Wage earning contributed about 23 percent of total annual income for the land-poor households. Microcredit helped participant households to earn about 8 percent higher income than that of the non-participants. (d) Employment The participant households are better able to ensure more employment on own farms due to their better access to the land rental market. Wage and self-employment in non-agricultural sector is also higher for the participant households due to their access to microcredit program.

(e) Assets: land and non-land Average size of land owned by participant households is lower than the non-participants; 91 decimals compared to 149 decimals. The BIDS study however suggests that the eligible participants mortgage or rent-in more land than the non-participants, and therefore, have larger operational holding. Higher percentage of program participants own poultry, goat/sheep and cows compared to non-participants. A higher percentage of the participants own bicycles (12.5% compared to 8%), boat (3.7% compared to 1.6%), irrigation equipment (1.23% compared to 0.23%), radio (17.9% compared to 12.6%) and rickshaw/van (8% compared to 2%) thus showing higher asset ownership of the participants.

Social and Other Development Impacts (a) Health and Nutrition There is positive program placement effect on nutrition status. (b) Sanitation and Drinking Water The BIDS study finds small positive influence of participation on waste disposal and use of sanitary toilets among the land-poor households with no clear evidence of program impact on hand-washing. The use of pure drinking water from hand tube well was found universal. (c) Literacy and School Enrollment of Children Adult literacy rate is significantly higher among the eligible participants. The BIDS study also found that program participation increases the chance of both boys and girls to be enrolled in schools. (d) Empowering Women Microcredit programs' main target is women. There are strong evidences that, microcredit programs contribute to women's empowerment. One consistent finding is the increased self confidence and increased self-esteem. Another is women's increased in decision making in the areas of family planning, children's marriage, buying and selling of properties and sending daughters to school. There have been some evidences that members of microfinance institutions are able to stop domestic violence due to personal empowerment and through group action. In Bangladesh, microcredit programs have also increased women's participation in the activities of local government. Some women microcredit clients have been elected as Chairpersons and Members of various Union Parishads, the lowest and most vibrant tier of local government. Now

women microcredit clients take greater roles in community activities and organizing for social change.

Evaluation and Findings

This section includes questions about the evaluation of borrowers before and after getting the loans. Normally, the MFIs have been successful in expanding their outreach by providing microcredit to increasing numbers of borrowers who are near the poverty line, not well below that. The MFIs adopt this approach to reach financial viability within a reasonable time frame. If the MFIs are to borrow (from PKSF and other sources) at a rate close to market rate of interest, the effort to reach financial viability may become difficult and delayed. The partner organizations (POs) of PKSF have achieved financial viability at the present (subsidized) rate of service charge of PKSF. Therefore, in the context of Bangladesh there seems to be a trade -off between outreach and sustainability of MFIs and they should strike a judicious balance between the two which may enable them to achieve financial sustainability. The main objectives of microcredit programs are to increase employment opportunities and to enhance income adequate

to lift the poor above the poverty line on a sustainable basis. A summary of the findings of some impact assessment studies is presented in table below. Table: Evaluation of the Microfinance Facility

Source

Economic Indicators

Type of Social Indicators Change

Type of Change

Hossain 1985

Return on investment Household income Employment

+ + + + + ? + Social Investment +

Hossain 1988

Working Capital Non-agricultural investment Agricultural investment

Labour force participation + rate Income BIDS 1990 Income Expenditure Emplo yment Land Purchase IMEC 1995 Economic empowerment Pitt & Khandker 1995 Rahman 1996 Various labour supply Mens labor supply Household Expenditure Household expenditure on consumption Human Capital and fixed investment Employment + ? + + + + + + + + Social empowerment Girls schooling Contraceptive use Womens non land asset Number of meals taken by men Number of meals taken by woman School enrolment rate Attitude to education + + ? + ? ? + ? + Child woman ratio School enrollment ? +

Pure drinking water

Findings
This study aims to measure the improvement of microcredit beneficiaries quality of life. More precisely, the goal is to measure the effectiveness of microfinance in reducing poverty from the beneficiarys perspective. This section attempts to take stock of all major efforts at poverty alleviation through microfinance in Bangladesh. After the overall analysis we can find out the following key points out of this research: From the perspectives of beneficiaries, in reducing the poverty of borrowers in poor areas in Madaripur. Microfinance showed a positive effective on poverty reduction and life betterment but with a small magnitude. The results show that the lack of training provided to beneficiaries and the haphazard types of micro-projects are the main reasons for these limited effects.

The result revealed that majority of beneficiaries was poor and were in the active age group of between 21-42 years representing about 59.62% Microfinance loan increase living standards as significant levels. Microfinance loan increase both income and assets of the borrowers through its services. The interest rates charged by the MFIs are very high (averagely 20.31)