Impact of microfinance on household income and consumption in Bangladesh: Empirical evidence from a quasi-experimental survey

Abstract

Although the microfinance movement has developed rapidly in Bangladesh over the last three decades, there has been little research on the wider contributions of microfinance to the livelihood of its clients. Moreover, there is no consensus in the microfinance literature that has attempted to control for selection bias. Therefore, to fill up this gap in the literature, this study examines the impacts of microfinance on income and consumption of households in Bangladesh that ultimately lead to poverty reduction. The main objective of this paper is to examine the effects of microfinance on the economic welfare of member households using a quasi-experimental survey pioneered by Coleman (1999). The data were collected across 20 villages in four districts of Bangladesh using quasi-experimental survey approach. The sample was designed so that member households of microfinance programs were compared with non-member households of similar characteristics. In the survey, member-households were sampled from a list of microfinance members in each village. For non-member households, the sample frame consists of households who own less than half an acre of land and were ranked as poor by village heads. The total number of households interviewed was 439, or about 22 households per village. Two sets of pre-tested structured questionnaires were administered to the sample households. In our econometric analysis, economic wellbeing is proxied by the measures of household income and consumption. The empirical results indicate that microfinance members remain poorer than non-members. But participation in microfinance has positive impacts: one percent increase in the duration of microfinance membership is associated with an increase of income and consumption per adult equivalent by 0.19 and 0.16 percent, respectively. Also, an additional month of participation in microfinance is associated with the lower probability of being poor (using $1.25 PPP per person per day) by 7 Percentage points. Our results suggest that the overall impact of microfinance operations on the economic well-being of the microfinance participants is positive. Microfinance participants’ economic well-being as proxied by income and consumption improved significantly after joining the microfinance program. The policy implications from the obtained results are that (i) the government should take steps to improve favorable environments for petty business (e.g., better infrastructure, and training of business knowledge) to enhance the effectiveness of microfinance on income-generating activities; (ii) microfinance institutions should adopt policy to reduce the interest rate and to introduce diversified products.