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Has Microcredit Helped the Rural Poor of Bangladesh? An Analytical Review of the Evidence So Far

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  • Siddiqur R. Osmani

Abstract

This paper reviews the evidence that has accumulated so far on the impact of microcredit on poverty in rural Bangladesh. The early studies on the impact of microcredit almost invariably found that microcredit had made a positive contribution not only in reducing poverty but also in a host of other economic and social dimensions. These studies soon came to be questioned, however, on the grounds of econometric methodology. It was argued, in particular, that various kinds of ‘selection bias’ vitiate their findings and lend an ‘upward bias’ to their estimates of the impact of microcredit. The possibility of ‘upward bias’ was especially damaging since it meant that the claim of a positive contribution of microcredit could no longer be credibly made. Later studies used sophisticated techniques to get rid of this bias; but while the earliest of this second generation studies continued to find positive contribution of microcredit, others soon began to question their findings, resulting in a prolonged and sometimes obscure debate on econometric methodology. Some of the critics even claimed to find no evidence for the impact of microcredit at all, even by using the same datasets as used by those who had claimed to find a positive impact. The review presented in this paper comes to the conclusion that the original finding about the positive contribution of microcredit survives this debate even though there might be some doubt about the precise magnitude of the impact. More importantly, as most of these debates centred around studies based on cross-section data, they have become mainly irrelevant with the emergence of third generation studies based on panel and quasi-panel data which are able to deal with the problem of selection bias much more satisfactorily. These studies confirm that microcredit has indeed made a positive contribution towards reducing poverty in rural Bangladesh. According to a conservative estimate, microcredit has helped reduce overall rural poverty by about 5 per cent and extreme poverty by about 10 per cent. Considering the borrower households alone, microcredit has helped roughly 1 in 10 borrowers to come out of poverty and 1 in 5 borrowers to come out of extreme poverty. Another way of looking at these numbers is that with the help of microcredit roughly about 2 per cent of borrowers have been able to climb out of poverty every year on the average. If these figures look less than spectacular, there is no reason to expect otherwise because, firstly, microcredit is just one intervention among many that have a bearing on poverty and, secondly, considering that many of the borrowers were at the bottom of the rung to begin with and that loan amounts are but a very small fraction of even poor household’s total income one could not possibly have expected any significantly larger number coming out of poverty. There are good reasons, however, why these numbers should not be belittled either. In the first place, there is hardly any other intervention that has been able to bring 1 out of 10 beneficiaries out of poverty anywhere in the world. Secondly, the benefit of microcredit goes well beyond the number of people it manages to pull above the poverty line. The discourse on microcredit should move on. Instead of taking rigid positions on the efficacy of microcredit in general, the protagonists should focus attention on the details of how microcredit can be made more useful for the poor.

Suggested Citation

  • Siddiqur R. Osmani, 2014. "Has Microcredit Helped the Rural Poor of Bangladesh? An Analytical Review of the Evidence So Far," Working Papers 23, Institute of Microfinance (InM).
  • Handle: RePEc:imb:wpaper:23
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