Microfinance and Poverty: Evidence Using Panel Data from Bangladesh

TLDR

Micro‑finance mainly supports informal activities with low market demand, so its aggregate poverty impact in low‑growth economies is expected to be modest, with observed borrower‑level effects arising from income redistribution or short‑run income generation. The study investigates micro‑finance’s poverty impact using household‑level panel data from Bangladesh. The analysis employs household‑level panel data from Bangladesh to examine micro‑finance effects. The results show that micro‑finance benefits the poorest, sustains poverty reduction among participants, generates positive village‑level spillovers, and is more effective at reducing extreme than moderate poverty. This paper is part of a broader effort by the Rural Development, Development Research Group to analyze targeted programs’ impact on the poor.

Abstract

Micro-finance supports mainly informal activities that often have low market demand. It may be thus hypothesized that the aggregate poverty impact of micro-finance in an economy with low economic growth is modest or nonexistent. The observed borrower-level poverty impact is then a result of income redistribution or short-run income generation. Khandker addresses these questions using household level panel data from Bangladesh. The findings confirm that micro-finance benefits the poorest and has sustained impact in reducing poverty among program participants. It also has positive spillover impact, reducing poverty at the villate level. But the effect is more pronounced in reducing extreme rather than moderate poverty. This paper - a product of Rural Development, Development Research Group - is part of a larger effort in the group to analyze the impact of targeted programs on the poor.