Microfinance, Moneylenders, and Economic Shocks: An Assessment of the Bangladesh Experience

The effectiveness of microfinance in improving the economic lives of the poor has been under extensive scrutiny in last two decades. Most of the studies on Bangladesh focus on the poverty and women’s empowerment impacts of microfinance. We provide a discussion on two relatively neglected aspects: the impacts on moneylenders, and the coping ability of households facing adverse shocks. The available evidence suggests that the microfinance in Bangladesh helped free many households from the “clutches” of moneylenders, contradicting the claim of some critics that microfinance exacerbates their dependence on moneylenders. The likelihood that a household takes loans from moneylenders declines by about 70 percent once it becomes a member of a microfinance program. However, the evidence also suggests that the moneylender interest rate goes up when the MFI coverage is high enough in a village, implying that the remaining clients of moneylenders suffer a negative pecuniary externality. The evidence on coping ability suggests that microfinance membership improves food security during flood and Monga. But microfinance membership does not reduce the propensity to sell labor in advance in the lean season and may not help a household undertake short-term migration to urban labor market in response to a shock.