Declining Benefits to Membership in Micro Finance Programs - Theory and Empirical Evidence

This paper studies the benefits of participation in micro finance programs, and shows that although membership in these programs is an effective instrument in combating inter-seasonal consumption differences, there is a threshold level of length of participation beyond which benefits begin to diminish. Returns from membership are modeled using an Euler equation approach. Fixed effects non-linear least squares estimation of parameters using data from twenty four villages of the Grameen Bank suggests that that maximum effect of participation occurs after three and a half to four years of membership. These estimates suggest that after seven to eight years of participation, membership no longer has a mitigating marginal effect on seasonal shocks to per capita consumption. Such non-linearities may underlie anecdotal evidence indicating that as compared to those who have recently joined, experienced participants are more likely to miss installment payments on outstanding loans.