In addition to their ability to reach the poor, including in some instances the very poor as commented upon above, microfinance institutions have opened up a new world of possibilities for small-scale entrepreneurs throughout the developing world. The approaches followed by these institutions and their capabilities have evolved rapidly in recent years, toward a broader base of clientele and improved lending technologies that increase the sustainability of the operations.45 By the same token, there has been movement toward
44. Elisabeth Rhyne and Maria Otero, 'Financial Services for Microenterprises: Principles and Institutions', in M. Otero and E. Rhyne (Eds), 1994, pp. 17-18.
45. See Rachel Rock, 'Introduction', in R. Rock and M. Otero (Eds), 1997, Chapter 1, p. 3.
treating borrowers as commercial clients rather than beneficiaries of assistance programs.46 Although 'there have been many more failures than successes', it is now clear that 'there is an increasing number of well-documented, innovative successes in settings as diverse as rural Bangladesh, urban Bolivia, and rural Mali. This is in stark contrast to the records of State-run specialized financial institutions, which have received large amounts of funding over the past few decades but have failed in terms of both financial sustainability and outreach to the poor'.47
Khandker carried out one of the most rigorous evaluations to date of microfinance programs, for the case of three programs in Bangladesh: Grameen Bank, BRAC, and a rural development program with a credit component known as RD-12. He evaluated them against the opportunity cost of the subsidized funds they used and against alternative kinds of programs such as investments in infrastructure. He comments that:
so-called outreach indicators, such as the extent of program coverage, for example, do not reveal whether program participation benefits the poor and, if so, how and at what cost. Repeated borrowing at high loan recovery rates may not indicate that participants benefit from microcredit programs. In fact, since many microcredit borrowers have no alternative sources of finance, the very low dropout rate among members with a low loan default rate may signal the dependency of the participants on the program itself. Even worse, repeated borrowers may use other sources of lending, such as informal lenders, to remain in good standing with a microlender. ... To establish the cost-effectiveness of supporting microcredit programs for donors and governments, research must show that the income and other gains generated by microcredit programs are greater than those generated by alternative uses of subsidized funds currently allocated to microcredit programs. .. .48
Some of his conclusions are as follows, including a strong indication of a gender effect, of the greater benefits of lending to rural women than to rural men:
The objective of these [microfinance] programs is to help promote self-employment for the unemployed poor and for women in order to reduce poverty. Sustained poverty reduction requires actions and policies that help improve both the productive and human capital of the poor. Policy interventions must be well targeted if benefits are to reach only the poor. In Bangladesh agricultural growth policies, which increased farm production and income, failed to improve either the physical or the human capital of the poor because their growth impact was neither broad-based nor technology-neutral. Targeted antipoverty measures without a credit component.. . have smoothed consumption for the poor who depend on wage income but they have failed to enhance their human and physical capital.
In contrast, microcredit programs have been able to reach the poor and enhance both their productive and their human capital by generating self-employment. These programs promote human capital development through literacy and social awareness programs and by targeting women. .. . How effective microcredit programs are in reducing poverty and reaching the poor is an important policy question that merits careful.. . evaluation. . ..
Microfinance reduces poverty by increasing per capita consumption among program participants and their families. Annual household consumption expenditure increases Tk 18 for every Tk 100 of additional borrowing by women and Tk 11 for every additional Tk 100 of borrowing by men. .. . Poverty reduction
48. S. R. Khandker, 1998, pp. 146-47 [emphasis added].
'The success of microfinance has destroyed three commonly held myths in rural finance: that the poor are not creditworthy, that women represent greater credit risks than men, and that the poor do not save' (S. R Khandker, 1998, p. 150).
estimates based on consumption impacts of credit show that about 5 percent of program participants can lift themselves out of poverty each year by participating in and borrowing from microfinance programs.
Microcredit programs also help smooth consumption, as well as the seasonality of labor supply. .. . Targeted credit also improves the nutritional status of children. The nutritional impact of credit is especially large for girls, and the impact is larger for loans made to women.. . .
Women have proved to be excellent credit risks, with loan default rates of only 3 percent - significantly lower than the 10 percent default rate for men. Women have clearly benefitted from microcredit programs. Program participation has enhanced women's productive means by increasing their access to cash income generation from market-oriented activities and by increasing their ownership of nonland assets. These improvements should enhance women's empowerment within the household, influencing their own and their children's consumption and other measures of welfare (such as schooling).. . .
Microfinance loans are well targeted. Large farmers . . . received more than 82 percent, small and medium-size farmers received just 13 percent, and poor and marginal farmers received only 5 percent of total loans disbursed by formal banks. In contrast, landless and marginal farmers received 72 percent, small and medium-size farmers received 24 percent, and large farmers received only 4 percent of microfinance loans.
Microcredit reduces poverty but so do other antipoverty programs. ... In terms of their effect on per capita consumption, Grameen Bank and infrastructure development projects appear more cost-effective than other programs, including BR AC, RD-12, agricultural development banks, and targeted food programs. Because different types of programs reach different types of beneficiaries, however, the higher cost-effectiveness of these programs may not indicate that resources should be reallocated from other programs.49
In sum, well managed microfinance programs can provide real benefits, often to groups in the population that are hard to reach through other kinds of programs. The challenge is to make the microcredit programs cost-effective and sustainable.
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