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World Bank Reports That Microcredit Works After All

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The World Bank has released a report that examines microfinance in Bangladesh over the longest period yet studied. The results were quite positive:

The results of the basic model unequivocally show that group-based credit programs have significant positive effects in raising household welfare including per capita consumption, household non-land assets and net worth. Microfinance increases income and expenditure, the labor supply of males and females, non-land asset and net worth as well as boys’ and girls’ schooling. Microfinance, especially female credit, also reduces poverty. The results using long-panel data thus confirm most of the earlier findings that microfinance matters a lot, and more for female than for male borrowers.

….Membership in multiple programs has grown steadily from none to 33 percent in 2010/11….Trading is perhaps now saturated with microcredit loans and households have already started to experience diminishing returns. In such circumstances, households must be assisted through skill training and the development of improved marketing networks to expand activities in more rewarding sectors and beyond the local economy; otherwise, microfinance expansion cannot be sustained. In short, the current microfinance policy of credit expansion alone may not be enough to boost income and productivity, and, hence, sustained poverty reduction.

“Examining the dynamics of microcredit programs in Bangladesh” uses long panel survey data spanning over 20 years to study the effects of microcredit programs in Bangladesh. It uses a dynamic panel model to address a number of issues, such as whether credit effects are declining over time, whether market saturation and village diseconomies are taking place, and whether multiple program membership, which is rising as a consequence of microcredit expansion, is harming or benefiting the borrowers. The paper makes the following observations:

•          Group-based credit programs have significant positive effects in raising household welfare including per capita consumption, household non-land assets and net worth;

•          Microfinance increases income and expenditure, the labor supply of males and females, non-land asset and net worth as well as boys’ and girls’ schooling;

•          Microfinance, especially female credit, reduces poverty;

•          Past credit has a higher impact on income and expenditure than current credit;

•          With higher village-level aggregate current male borrowing, the marginal effect of male borrowing on per capita income gets lower.

The paper concludes that the current microfinance policy of credit expansion alone may not be enough to boost income and productivity, and, hence, sustained poverty reduction.

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