Journal of International Development J. Int. Dev. 16, 331353 (2004) Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/jid.

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QUANTITATIVE APPROACH TO IMPACT ANALYSIS OF MICROFINANCE PROGRAMMES IN BANGLADESHWHAT HAVE WE LEARNED?

M. A. BAQUI KHALILY* Department of Finance and Banking, University of Dhaka, Bangladesh

Abstract: The quantitative impact assessment of micronance programmes, like the programmes themselves, originated in Bangladesh. This essay reects on the signicance and usefulness for present day researchers of the analytical advances made in Bangladesh since the beginning of the 1990s. Particularly in the area of selection bias, fungibility and the assessment of wider impacts, it argues, those advances are crucial, and need to be borne in mind by all practitioners; but nancial sustainability remains an unresolved problem. Copyright # 2004 John Wiley & Sons, Ltd.

Micronance as a concept is nothing new. But it did not draw the attention of the professionals, international agencies, and policymakers until micronance as a concept for poverty alleviation through institutional mechanisms was globally perceived. The Grameen experiments and the successful operation of Grameen Bank have led to the wider acceptability of the strategy that the access to credit of the poor households through institutional arrangements matters. The institutional mechanism is based on the concept of group-lending. Group-based production technologies are diverse in Bangladesh. The production technologies used by BRAC, ASA and PROSHIKA are different in nature. It has been over two decades that micronance services are being provided to the poor households through micronance institutions. As the goal of providing such services has all along been poverty alleviation, quite a large number of impact studies have been conducted in Bangladesh. However, the objectives of the studies have been diverse. Most of the studies evaluated impact at the household level (e.g., Khandker, 1998a; Zohir et al., 2001; Pitt and Khandker, 1998b; Mustafa et al., 1996; Husain, 1998). Few studies have focused on the supply-side analysis of impact of micronance (e.g., Khandker et al., 1995;

*Correspondence to: M. A. Baqui Khalily, Department of Finance and Banking, University of Dhaka, Dhaka 1000, Bangladesh. E-mail: bkhalily@bangla.net

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Khalily et al., 2002), but none have been conducted from the macroeconomic perspective. Consequently, we have incomplete understanding of the impact of micronance both at the micro and macro level. Impact analysis, using demand-side or household level data, has dominated the micronance research agenda during the past decade. Quite a large number of studies have been conducted with diversied methodologiesquantitative and qualitative models. The general conclusion of the studies has been positive impact of micro credit at the household, enterprise and individual levels. Extent of impact is the subject of the quantitative approach to impact analysis. The approaches to and the methods of impact assessment are diverse. They vary from descriptive to econometric; from limited use to extensive use of econometric techniques. What lessons do we get from such analysis? These questions are addressed in this paper.

MICROFINANCE IN PERSPECTIVE Micronance has been viewed from different perspectives. A very common perspective has been poverty alleviation. Most studies have focused on determining the extent of impact at the household level (e.g. Khandker, 1998; Husain, 1998; Zohir et al., 2001). Micro credit impacts on poverty reduction through its impact on income, employment, consumption, asset accumulation and savings. But over-excitement of impact of micronance in poverty alleviation tends to undermine the long-term role of micro nance in the sustainability of MFIs. The failure of development banks and the adverse impact of distortions in rural nancial markets (e.g., Von Pischke et al., 1993; Adams et al., 1984; Braverman and Guasch, 1989; Meyer and Nagarajan, 2000) have caused emphasis to be placed on sustainability of micronance institutions as a process of developing rural nancial markets and sustaining credit facilities for the poor households (e.g. Khalily et al., 2000; Khandker et al., 1995; Yaron, 1992). However, the development sociologists view the contribution of micronance and micronance institutions as the process of reducing the role of the state in nancial markets. In the absence of ownership and/or regulation, the utility function of MFI top executives may dominate idealized patterns of organizational behaviour. In recent years, the role of MFIs has been viewed more as a search for political inuence. Cheap donor money may contribute to such a process of promotion of political interests. In addition, cheap money may make operation costly in the absence of any incentive for cost-effective operations. These are likely to undermine the basic role of micro nance in poverty alleviation. Poor households do not have higher income level that can absorb adverse effects of external shocks. Zaman using BRAC experience showed that micro nance contributes to consumption-smoothening and minimizing vulnerability. Similar ndings were also derived in other studies (e.g., Sen, 2001). Feminists and gender specialists argue that micronance empowers women because access to micro-credit has increased their role in family decision-making. The female members are not only involved in economic decisions but also in family well-being. Several empirical studies provide empirical evidence of womens empowerment because of micronance (Hashemi, Schuler and Riley, 1996; Mayoux, 1999; Mahmud, 2001a,b; Halder, 1998).
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Micronance Programmes in Bangladesh MICROFINANCE PROGRAMMES FOR POVERTY ALLEVIATION IN BANGLADESH

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In the late seventies and early eighties, two approaches were experimented for nancing poverty alleviation programmes of non-government organizations. One was the externalnance based experiment as adopted by Grameen Bank, and the other was the self-reliant model experimented by BRAC and ASA. The Grameen model experimentally made use of bank credit for its expansion. The underlying thesis was that access to external credit would accelerate the process of poverty alleviation. BRAC started its initial experiment on self-reliance based on local resource mobilization in the early seventies. ASA did experiment with a similar approach in the eighties. These experiments led to the general conclusion that the pace of poverty alleviation, based on mobilization of local resources, is very slow and negligible in most cases because of limited surplus resources. The success of the Grameen Bank model and the limited success of local-resource based approach led to searching for external nance. Bangladesh Bank as well as the international agencies contributed to the early take-off of micronance in Bangladesh. The major MFIs, like ASA, PROSHIKA and BRAC, have been highly dependent on cheap funds. During the past two decades there has been a wide expansion of micronance services in Bangladesh. There is no precise estimate of the number of MFIs and the number of branches operating in the country. However, it is widely believed that more than 1000 MFIs with a network of over 4000 branches have been operating. It is a sector that has created jobs for over 100 000 employees. MFIs have grown over time with both government and non-government ownership. The major programmes of the government are Bangladesh Rural Development Board (BRDB) and Palli Daridro Bimochon Foundation (Rural Poverty Alleviation Foundation). Grameen Bank is recognized as a specialized bank. The other MFIs are non-government entities (to be referred subsequently as non-government MFIs). Until December 2001, 632
Table 1. MFIs
Grameen % BRAC % ASA % Proshika % Top 22 except top 3 MFIs % BRDB % PDBF % Other small MFIs % Total

Structure of micronance in Bangladesh, 200001 (In Million) Total active members

2.38 12.54 3.51 18.50 1.98 10.44 2.64 13.92 2.66 14.02 3.6 18.98 0.29 1.53 1.91 10.07 18.97 (100)

Total net savings

11 758.00 48.55 4614.56 19.06 2010.12 8.30 1639.97 6.77 2005.25 8.28 0 0.00 481 1.99 1708.13 7.05 24 217.04 (100)

Cumulative disbursement
147 048.00 40.48 77 593.75 21.36 43 704.18 12.03 20 611.88 5.67 27 343.64 7.53 21 090.00 5.81 7746.00 2.13 18 085.79 4.98 363 223.24 (100)

Outstanding loan
13 151.00 28.25 8537.83 18.34 7309.52 15.70 5009.40 10.76 4953.67 10.64 3387.00 7.28 716 1.54 3486.63 7.49 46 551.05 (100)

Source: Credit and Development Forum (CDF), MFI Statistics, June 2002. Copyright # 2004 John Wiley & Sons, Ltd. J. Int. Dev. 16, 331353 (2004)

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MFIs including Grameen Bank and two government programmes had active members of 18.97 million and disbursed a cumulative total of Tk. 363 billion, and loans outstanding of Tk. 46.6 billion (Table 1). The share of Grameen Bank has been around 13 per cent. Three leading non-government MFIs (ASA, BRAC and PROSHIKA) constitute around 43 per cent of total members mobilized. Although the share in membership of Grameen Bank is around 13 per cent, its share in loans outstanding has been around 29 per cent. This is because of increasing loan size. Two government programmes with a share of around 22 per cent in membership mobilization had loans outstanding of Tk. 4 billion by the end of 2001 (Table 1). This suggests that non-government MFIs provide credit to the almost fty per cent of the aggregate members mobilized. This large amount of disbursement (annual disbursement of over Taka 40 billion annually) is likely to have wider impact at the household, individual and village levels.

PERSPECTIVE OF IMPACT ANALYSIS Poor households are subject to liquidity constraints. As such, any additional ow of external nancial resources, be it from MFIs or banks or individuals, will relax the intensity of this constraint. Hence, it will enable the households to broaden the portfolio mix, which in turn will have positive impact outcomes at the household level. Outcomes may be classied into intermediate-outcomes and end-outcome. Intermediate outcomes include income, consumption expenditures, assets accumulation, savings, child education, nutritional intake and employment. Poverty reduction is the end-outcome. All the intermediate outcomes have a compounded impact on the end-outcome. However, feminists, development sociologists and women professionals may consider female empowerment an end-outcome as well. But given the historical underlying reason of the emergence of micronance, poverty-reduction is the end-outcome. Womens empowerment may be termed a spillover impact of intermediate outcomes. At the enterprise level, impacts will increase in terms of revenue, prot, assets, and employment, among others (Chen and Dunn, 1996; Dunn and Arbuckle, 2001; Sinha, 1998). At the individual level, impacts are found in womens empowerment and increase in personal savings among others In addition, there will always have spillover impactsincrease in wages; investment (Khandker, 1998a; Hulme, 2000). Finance will always have positive impact at the household level or at the individual level when such credit is more structured and targeted with strict monitoring. Because of such obvious impact, professionals often question the need for impact assessment (as quoted in Morduch). Nevertheless, there is still the need for assessing the extent of outcome on several grounds. First, nancial resources should be allocated efciently so that there can be a net positive welfare gain. Second, the micronance programme impact can be externally validated for continuity in intervention. Third, effectiveness of micronance can be compared against the rate of return on alternative uses, which in turn will contribute to efcient allocation of resources. Fourth, there will be deeper understanding of the process through which micronance intervention benets poor households and the process through which spillover impacts occur at the village and regional level. On the top of these arguments, donors have a special preference for impact analysis in order to justify their investment to their taxpayers. Impact studies are donor-driven. They have little utility to the MFIs (Hulme, 2000). Nevertheless the ndings add to our knowledge. How credible is the knowledge? We now examine this question.
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Micronance Programmes in Bangladesh METHODOLOGICAL DEBATE IN DEMAND SIDE ANALYSIS: WHAT DO WE LEARN?

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Quite a large number of studies have been conducted on the impact of micronance or micro credit at the household level during the past fteen years. Morduch and Haley (2002) have done a comprehensive review of the impact literature. The researchers in the AIMS project of USAID conducted a review of the selected major studies. In Bangladesh, Rahman (1998) conducted a comprehensive survey of the impact studies carried out in Bangladesh. This section is drawn upon those reviews. Fundamentally, there has been debate over the methodologies of impact studies. Such debate arises because of possible selection bias, endogeneity of program placement and fungibility of fund. As Gaile and Foster argue, impact research focuses on precision and accurate assessment of impact. Hulme describes the methodological issue as complex because of selection bias and endogeneity. Hulme (2000) identies several sources of selection bias: (i) locational selection; (ii) difference in invisible attributes between the treatment group and control group; (iii) Hawthorne effect of intervention on treatment group; (iv) contamination of control groups by treatment groups; and (v) fungibility of micro credit. Methodologies followed in different studies are not necessarily consistent and unique, and have not been able to control the sources of selection bias. Nevertheless, there is a consensus that programme endogeneity and selection bias have to be tackled appropriately for reliable estimates of the impact. The decision of individuals to participate or not to participate in micronance programmes is determined by the extent of incentives provided by micronance institutions, given observable and unobservable characteristics of the family and the individuals including nancial wealth. The personal and family characteristics, behaviour and attitudes differ from individual to individual. Hence, they too emerge as the determinants of programme participation. The known and observable characteristics can be dened and measured, but there will be always be some unobservable characteristics that have inuence on programme participation. The extent of impact of credit is, however, also impacted by programme placement. It is well evident that micronance institutions place their branches in accessible and infrastructurally developed areas (e.g., Khandker, 1995). Hence, programme placement does have impact on the outcome at the borrower level. However, identifying the socio-eco-political factors and environment in assessing programme impact at the household level can control this endogeneity. Hulme argues that with the exception of fungibility, other sources of selection bias can be tackled through careful selection of control groups. Most of the studies (e.g., Pitt and Khandker, 1996; Mustafa et al., 1996; Hashemi et al., 1996; Chen and Dunn, 1996; Dunn and Arbuckle, 2001; Coleman, 1999) used quasi-experimental design (treatment group and control group) to estimate the effect of micro credit. The difference between the parameter estimates of treatment and control groups is the effect of intervention. However, precision depends on the ability to control for observable and unobservable characteristics. The issue of fungibility of credit is a critical problem in precisely determining the impact of credit (Adams et al., 1984; David and Meyer, 1983; Von Pischke 1983). This arises from inability to separate out the uses of micro credit and other funds between households and enterprise. No studies have successfully controlled for fungibility. It is a matter of concern, as argued by Hulme (2000), when impact studies focus exclusively on the enterprise. The problem is equally present when there is inseparability of enterprises and household activities and behaviour in most of the poor households, and inseparability between micro
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credit and informal and/or formal credit. Khandker (1998b) has candidly recognized the problem of fungibility in impact assessment. However, he argues that the close monitoring of group-based credit partly resolves the problem of fungibility. Failure to control for fungibility may over-estimate the impacts of micro credit intervention. This is particularly true when households have access to multiple sources of credit (Khalily et al., 2002; Husain et al., 1998; Khandker, 1998a; Sinha and Matin, 1998). As the issue of fungibility is not fully tractable in the impact assessment of micro credit, several other approaches have emerged for a better understanding of the process through which micro credit intervention inuences desired outcome. They are: case study, household economic portfolio and anthropological studies. Mosley (1997) positively argues for extensive case study in order to understand the process and inuence of interventions, and identify the difference between intended use and actual use of micro credit in order to control for fungibility. Similarly the anthropological approach to impact studies considers households as system and interaction among the family members and other different agents based on their utility functions (Gaile and Foster, 1996). This minimizes degree of the so-called unobservable factors in heavy-duty econometric studies. More information is available in case-based and anthropological studies. However, a good combination of case, anthropological and econometric approaches would provide comprehensive information on the nature and process of intervention and its impact on desired outcomes. Khandker and Faruquee (2001) used a different approach to study the impact of agricultural credit on desired outcomes in Pakistan. They followed a two-stage approach. In the rst stage, demand for credit was determined using household-level and village/ regional-level characteristics. The predicted demand for credit was used as a variable in the household welfare outcome models in the second stage. The variables included instrumental variables and predicted demand for credit. Although somewhat conventional in concept and approach, the AIMS Team used a Household Economic Portfolio model. In the model, total household resourcesinow and outoware accounted for. Three aspectsfeminist, anthropology and economic were the underlying constituents of the framework. Based on both the case-study and econometric approaches, the framework provides separate estimates of the impact of micronance on desired outcomes. The issue of fungibility is tackled within this approach.

REVIEW OF SELECTED IMPACT STUDIES WITH DIFFERENT APPROACHES Four major impact studies that used different approaches are discussed in this section. They are: (i) the World Bank study (Khandker, 1998a) conducted in Bangladesh in 1992 94; (ii) the BRAC studies (Mustafa et al., 1996, and Husain et al., 1998) on impact of BRAC RDP credit in Bangladesh; (iii) the AIMS study (Dunn and Arbuckle, 2001) conducted in Peru during mid-90s; and (iv) the PKSF study in Bangladesh (Zohir et al., 2001). These studies are selected from the perspectives of quantitative methodology used and coverage of the study.

The World Bank Study (Khandker, 1998a): Rigorous Econometric Analysis The World Bank study was the rst major study on the impact of micronance in Bangladesh conducted in 199294 by Khandker in collaboration with the Bangladesh
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Institute of Development Studies (BIDS). The study examined and assessed the impact of three major micronance programmesGrameen Bank, BRAC credit programmes (Rural Development Programme and Rural Credit Programme) and RD-12, a government micronance programme under the Bangladesh Rural Development Boardin Bangladesh. Impact was assessed at three levelshousehold, village and institution. Considering the scope, coverage, impact outcome set and comprehensive and sound methodology used, the study is often regarded as mother of all surveys in micronance. It is the rst major study that unearthed impact of micronance and provided a good understanding of the extent and the process through which micronance inuence its multiple target. The survey was conducted over 1800 households selected randomly from 86 villages in 29 thanas. Of the 29 thanas, ve thanas as non-programme control, and 24 thanas (eight covering each of the programmes) as programme areas were selected. Three villages from each thana were selected randomly. The targeted households were selected based on the pre-study village census on selected characteristics. Targeted poor households were selected based on landholding of less than or up to 50 decimals. Control households included non-participants and non-target households (with landholding of more than 50 decimals). The outcome parameters considered in the household level analysis were consumption, savings, income, education, nutrition, and wealth accumulation. At the individual level, the major indicator was female empowerment. The village level outcome parameters were wage and employment. The institutional outcome parameters were outreach, cost efciency and sustainability. A set of comprehensive questionnaires were designed, pre-tested and administered for data collection. In order to control for seasonality at the household and village levels, three rounds of survey were conducted over the same set of households. The major ndings of the study were quite expected. First, micro-credit contributes to poverty alleviation. At the household level, 5 per cent of Grameen and 3 per cent of BRAC households rose above the poverty level every year. At the village level, there were signicant decline in moderate poverty and extreme poverty. Second, there has been an increase in average household income by around 30 per cent for Grameen Bank and 33 per cent for BRAC clients. Several factors like increase in self-employment and increase in wages because of shrinkage in labor supply may have contributed to it. Third, as a consequent of decline in labour supply, wages in Grameen villages and selfemployment in off-farm economic activities in programme villages increased. Fourth, marginal propensity of female borrowers to consumption out of loan was higher than that of male borrowers. It was estimated at 18 per cent for women borrowers as against 11 per cent for male borrowers. Fifth, micronance had positive impact on net worth. A 10 per cent increase in BRAC credit increased household net worth by 0.09 per cent, and 0.14 per cent for female borrowers. Sixth, the impact was positive on childrens schooling. A one per cent increase in Grameen credit for female borrowers increases the probability of school enrollment by 1.9 per cent for girls and 2.4 per cent for boys. Seventh, microcredit contributed to smoothening consumption and reducing vulnerability. The major limitations of the demand-side analysis were failure to (i) control for fungibility, and (ii) separate out effects of other sources of credit (informal and formal) from that of micronance on impact outcomes. Expected effects of these failures on impact outcomes are probably ambiguous. However, these do not undermine the impact ndings. The ndings are quite expected. Khandker (1998a) justied the micro-credit intervention through comparative analysis of social-cost benets of micro-credit and other alternative interventions like the food for works programme.
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One of the great strengths of the study is the application of sound econometric techniques in solving the problems of endogeneity and determining efciently impact outcomes. As a result, the author could explain the impact of micro credit intervention on welfare outcomes in terms of elasticity. The authors used maximum likelihood methods to jointly determine the demand for credit and the impact outcomes. Based on the weighted sampling, the authors tested for specication of the equations estimating impact outcomes. The tests showed that credit impact by gender varies, being higher for women. The authors nally estimated impact outcomes using xed effect instrumental methods controlling for both village and household heterogeneity. This enabled them to control for sample selection bias. The major conclusions were: micronance makes a difference, and contributes to better understanding of the comprehensive positive impact at the household and individual levels. Not only that, micronance impacts at the household and individual levels, it makes an expected impact in labour markethigher wage because of increase in selfemployment and decline in the supply of labour. The extent of impact as shown by Pitt and Khandker (1996) and Khandker (1998a) was not free of any criticism. Morduch questioned the ndings at the household level and argued that due to sample bias, impact was over-estimated. He estimated that 30 per cent of the programme participants had land of above 50 decimals. Using Khandkers data set, Morduch (1998) argued that the impact of Grameen Bank credit was minimal. However, Pitt (1999) disagreed and re-estimated the impact outcomes, and showed that there were no changes in the ndings and the estimates were robust.

The AIMS Study in Peru (Dunn and Arbuckle, 2001): Household Economic Portfolio Analysis The major limitations of cross-sectional econometric-based studies (e.g., Khandker, 1998a) on impact of micro-credit are limited effectiveness in tackling the problem of selection bias and attribution, and fungibility. The possible problems of selection bias and attribution are much reduced in the studies using panel data. However, the problem of fungibility is difcult to tackle. The assessing the Impact of Micro enterprise Services (AIMS) project of USAID used the Household Economic Portfolio (HEP) framework for assessing impact of micro enterprise services at three levelshousehold, enterprise and individual. As argued by the AIMS Team, the HEP model tackles the problem of fungibility as total household and economic activities along with total ow of nancial resources are considered. Under the project, three major studies were conducted in Peru, India and Zimbabwe. The framework used was uniform. I decided to report the ndings of the Peru study for several reasons. First, during the period of study, the Peru economy was in recession. Second, culturally Peru is different from Bangladesh. Differences between the ndings of the World Bank (Khandker) study in Bangladesh and the ndings of the Peru study may provide some understanding of the effectiveness of micronance in a different socio-cultural and political environments. The Peru study evaluates the impact of a micronance institutionAccion Comunitaria of Peru (ACP)which later on became a bank, known as Mibanco. It is a longitudinal study using data of 1997 and 1999, conducted over the same households although some of the households in the 1997 survey were absent. The 1997 survey had a sample of 701 households. Finally, the 1999 survey contained samples of 520 households,
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of which 305 were in the treatment group and 175 were non-client control households. The sample design was quasi-experimental. Several statistical techniques were used. The changes in group-differences in impact variables between 1997 and 1999 were tested by t-test. Analysis of covariance was used to test for impact hypotheses. Two steps were followed in the ANCOVA procedures in the Peru study. First, it identied a matching group of treatment and control households that have the same 1997 values for the impact outcomes and moderating variables. In the second stage, a similarly matched group of treatment and control households were identied using the 1999 values for impact outcomes and moderating variables. Then the differences in outcomes and the effects are statistically compared and tested. Analyses were made at the enterprise, household and individual levels. At the enterprise level, micro-credit has a positive impact on microenterprise net revenue (treatment group had higher average prot of more than US$1000 than the non-client households), accumulation of xed assets (average accumulation in xed assets was US$500 higher for the treatment group), and employment generation (treatment group had provided about 9 more employment days). The ndings at the household level are little diverse. Impact of micro-credit was not positive for all the outcomes. It had positive impact on income (treatment group had higher per capita income of more than US$266 in real terms in 1999). Micro-credit as expected had contributed to income diversication. No positive impact of micro credit on expenditures on household appliances and education was reported. However, income-increase for the treatment group contributed to increase in expenditure on food consumption. At the individual level the ndings of the Peru study are mixed. On the positive side, micro-credit enables female borrowers to have control over nancial decisions, and be prepared for the future. But on the negative side, the study team did not nd any positive impact of micro-credit on personal savings, self esteem and respect from others. Although the ndings have been mixed, the study showed that nance matters for poverty alleviation. Small loans make a difference but it may not be adequate to cope with the adverse impact of externalities and economic recession. This is the evidence of the Peru study. The extent of economic recession during 199799 was such that higher level of enterprise prot and income diversication could not contribute to assets accumulation and education expenditures because incremental income could not outweigh adverse impact of economic recession and therefore, was mostly spent on food expenditures.

The BRAC Study (Mustafa et al., 1996; Husain, 1998): A Comprehensive Descriptive Study Bangladesh Rural Advancement Committee (BRAC) conducted two major impact studies of the RDP credit programme in the 90s. Mustafa and his team conducted the rst impact study in 199293. Husain and his team conducted the second impact study in 199697. The basic objective of the rst impact study was to assess the impact of Rural Development Programme (RDP) at the household and individual levels. In order to have a wider understanding of the nature and the process of impact-creation, the study focused on households survey, village proles and village organization survey through case study. A total of 2125 households including 1375 RDP member households and 750 control households were selected for the household survey. Proles of 225 villages including 150 RDP villages, and case study of 15 village organizations were also prepared. The analysis
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was made based on the two-round survey data of the selected households. By and large, the study is descriptive in nature. The determinants of consumption expenditure and accumulation of wealth were identied through regression analysis. The methodology was a combination of econometric and case approaches. Despite being a descriptive one, the study provides some meaningful ndings. Older members of RDP are better off than the younger members and non-participating control group. They are economically better off. The study found that the four-year or more old member households had asset value of more than 112 per cent, average weekly expenditures of more than 26 per cent and per capita weekly expenditure of 15 per cent higher than those of younger member households of less than one year. In order to measure the impact of RDP credit and contextual variables on wealth and consumption expenditure, the authors used OLS. Education was found to have a signicant impact on wealth accumulation. RDP credit had relatively weaker impact although the coefcient was signicant and positive. RDP loan also had positive impact on consumption expenditures. A higher dependency ratio reduced the level of consumption. Given the nature of variables included in the regression equation, it is highly probable that there were problems of multicollinearity and endogeneity. The consistent nding was the fact that RDP credit had larger impact on female-headed households compared with the maleheaded households. Local conditions and initial wealth or endowment do matter in improvement in economic well-being. However, like other studies, the issue of fungibility was not resolved. It was reported in the study that nearly half of the households (46 per cent for male and 41 per cent for female) had loans from informal sources. The average amount of indebtedness of the informal borrowers was around Tk. 3500. It was around Taka 1400 for all the sample households. Through case studies, the study showed that women are better off. They are more empowered than before. But such empowerment increases with duration of membership with BRAC and size of RDP loan. Although the ndings are nothing unexpected, the study could not tackle the problem of fungibility. Application of econometric technique was quite limited. As such, the ndings from the descriptive analysis often remain econometrically untested. Thus, the conclusions may not be robust. However, the study provides a more comprehensive understanding of the process and the nature of impact of RDP inputs and other contextual variables inuencing the desirable outcomes. BRAC did a second impact study in 1998. In addition to the outcome parameters considered in the rst impact study in 1996, the second impact study focused on poverty reduction and its correlates, and womens empowerment in particular. Total number of selected households was 1700, of which 1250 were the BRAC households. The ndings were no different from the rst impact study. RDP credit does have positive impact on non-land assets (380 per cent higher), networth (50 per cent higher), savings (100 per cent higher). Because of the BRAC NFPE programme, the programme has positive impact on childrens schooling. The derived benets are more pronounced for the older members of BRAC. The study raised the question of sustainability of impact based on the nding that members with 84 months of membership length owned less assets than 4884 months group. The critical ndings emerged from the panel data analysis (Mallik, 1998) are: (i) an increase in about 8 percentage point in self-employment; (ii) an increase by over 7 percentage point in training and loan; and (iii) percentage of BRAC members borrowing from informal sources declined signicantly; an increase in current value of total asset by over 26 per cent.
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Halder (1998) did an analysis of poverty reduction and women empowerment in the second impact study. No measure of poverty reduction was made using the panel data. She provided an analysis of poverty reduction through comparing indices among participating households classied by length of participation, and also with control group. She used two indicespoverty-gap and FGT1 in estimating incidence of poverty. She estimated that incidence of poverty was 32 per cent higher for the control households. Halder, using the poverty-gap and FGT indices, showed that there is an inverse relationship between length of membership and intensity of poverty. Intensity of poverty is lower for the older members. Poverty-gap was estimated at 11.0 per cent for the households with membership of more than 4 years as against 15.3 per cent for the younger members with less than one year of duration. Similarly, she estimated, based on the poverty gap index, that poverty gap for the BRAC members was 13 per cent as against 19 per cent for comparison households. This means that intensity of poverty is six per cent lower for the BRAC members. She found an inverse relationship between RDP credit and incidence of poverty. Such a result is quite expected. Farashuddin and others assessed the impact of RDP credit on womens empowerment. She considered three pathways to empowerment. They are material, perceptional, and relational or power pathways. Around 45 per cent of the female members were involved in income generating activities, an increase of about 17-percentage point from the premembership period. Although not overwhelming, an increasing number of female members do have control over their own savings and do participate in the decision making process. Their dependency, as reported in the study, has declined over time, and they are more respected than before. Although the ndings demonstrate positive impact of RDP credit and other inputs at the household and individual levels, the study is more descriptive in nature. In only very selective cases like determining wealth and consumption expenditures, the authors applied regression technique. Endogeneity was controlled for. Moreover, the second impact study could also not address the issue of fungibility. It would have provided excellent evidence on sustainability of RDP impact had the authors compared the changes in the impact outcomes on the households studied under both the rst and second impact study.

The PKSF Study (Zohir et al., 2001): A More Disaggregated Analysis for Better Understanding Zohir and his colleagues at BIDS conducted a PKSF sponsored study on Monitoring and Evaluation of Micronance Institutions in 19982000. As a part of the study, the research team examined the impact of micro-credit programme of the Partner Organizations2 at the household, institution and individual levels. The study was conducted over 2903 sample rural households in 91 villages spread over 23 thanas in 13 regions. A three-round survey was conducted to capture for seasonality and time-bound effect. It is perhaps the rst study in Bangladesh that conducted a three-round survey in during the period 19982000. As such, this study provides information on impacts based on both cross-sectional and dynamic analyses.

1 2

The FosterGreenThombecke (FGT) index of poverty. MFIs that have borrowed under a dened framework from PKSF are termed as partner organizations. J. Int. Dev. 16, 331353 (2004)

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The basic objectives were to assess impact of micro-credit on economic well-being, social outcomes, poverty reduction, and womens empowerment. The study provides an analysis of the micro-credit impact by disaggregating target households by regular participation, complete dropout, recent dropout, new participants and non-participants. Consequently, intra-target group dynamics in relation to length of membership and impact outcomes, and impact outcome through comparative analysis of treatment and control groups are derived. In addition, the study provides a clear and systematic assessment of the impact of credit on poverty reduction. Such analyses were possible because of three-year data. The research team adopted both descriptive and econometric analyses for evaluating the impact of micro credit on desirable outcomes. Regression technique was used in possible cases to identify the determinants of outcomes. The descriptive analysis, because of disaggregation of target households by nature and length of participation, provides a deeper understanding of the extent of impact on desirable outcomes. Impact of micro-credit on economic well-being showed that the percentage of regular participants in farm activities has declined during the period 19972000. This has been because of increase in self-employment. More than three-fourths of the participants were engaged in self-employment. Consequently, crops as a source of income, as expected, have declined (Zohir, 2001). With respect to social outcomes, Mahmud showed that in relation to control or other participants, regular participants incurred more household expenditures. Their children have higher access to education. Simen Mahmud provides an analysis of the impact of credit on women empowerment, as dened by mobility, contraceptive use, household income control, expenditure decision and self-perception. She showed that mobility of the female regular participants has increased. The percentage of contraceptive use was estimated at 75 per cent for the regular participants as compared to 68 per cent for the non-participants. She showed that the role of female in crop-production related expenditures has increased, reducing gender inequality in production decisions. Finally there has been an increase in the status of female regular participants in the family, relations with spouse, and self-esteem in relation to occasional participants. Sen as a member of the research team provided an excellent analysis of the relationship between micro-credit and poverty reduction. He used three poverty indiceshead count, poverty gap and FGT. Using the time series data for the period 19972000, he showed that there has been a positive change in poverty reduction. Extent of poverty reduction was more pronounced for the regular participants than the occasional and non-participants. Based on head-count, poverty declined by 12.4 per cent, and 13.6 per cent based on poverty gap for this group. In contrast, poverty reduction was 6.9 per cent based on headcount and 10.7 per cent based on poverty gap for the non-participants. This means that micro-credit contributed to a net increase in poverty reduction by 5.5 per cent based on head-counts (difference between head-count ratios of regular and non-participants) and about 3 per cent based on poverty gap (difference between poverty gap of regular participants and non-participants) in two years. Such reduction is quite signicant considering the fact that there was a large-scale devastating ood in 199899, whose costs fell principally on poor households. The regular participants in micronance programmes possess higher ability to cope with adverse impact of natural calamity. Sen, however, showed that impact of small micronance programmes on poverty reduction was more pronounced than that of leading micronance institutions like PROSHIKA, ASA and Grameen Bank. This is probably because of more focused and well-monitored micronance programme in small areas of operation.
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Although the PKSF study provides an in-depth analysis of the impact of micronance programmes on desirable outcomes, the study has some weaknesses. First, it fails to tackle the issue of fungibility. Second, it did not control for the government development interventions and formal credit market in impact analysis. The study could have been more useful had the descriptive analyses been supplemented by sound econometric analysis.

USE OF DIVERSE METHODOLOGIES: COMMON FINDINGS BUT THE CRITICAL ISSUE STILL UNRESOLVED The major studies that I have reviewed used different methodologies with varied features. The ndings are broadly common even when studied with different methodology. Quasiexperimental design was adopted in each of the studies reviewed. But in most of the cases, no comparative analysis of the control and treatment groups was provided. The World Bank study (Khandker, 1998) has tackled the issues of endogeneity and selection bias soundly through using rigorous econometric techniques. Fixed effect methods were used to determine impact outcomes. This makes the estimates unbiased and efcient. Findings are robust. But the issue of fungibility remained a problem in the study. The methodology used by Pitt and Khandker is somewhat complex, and not easily perceived (Rahman, 2001). The Peru study (Dunn and Arbuckle, 2000) used a different methodologythe Household Economic Portfolio framework for analysis of the impact. Econometric application was not extensive. As the study was based on panel data, the authors used paired-difference tests and analysis of covariance. But the framework provides an interesting approach to tackle the issues of fungibility and selection bias. Moreover, the use of panel data, as argued by the authors, resolved the issue of selection bias and fungibility. The quasi-experimental design, as argued by Rahman (1998), could be less effective in the absence of nding out non-programme villages because of depth of micronance programmes in Bangladesh. The situation was partly experienced by Zohir (2001) and Husain (1998). Both of them used disaggregated target participants by length of membership as proxy for non-participant control group. Zohir used participants with less than one year of membership as proxy for non-participant group because the members belonging to this group did not get any micro credit. Such disaggregation tackles the concern as expressed by Rahman, and at the same time makes it possible to measure impact of different loan size. This is one contribution in the area of empirical methodology that Zohir (2001) and Husain (1998) have made. The study of BRACRBP is quite extensive but lacks rigour, as it is basically descriptive in nature. Occasionally the analysis was supplemented by case studies and econometric estimates of parameters. Because of the case analysis, a greater understanding of the impact and the process through which RDP impacts desirable outcomes is available. Multiple regression technique was used in a limited way only to nd out the determinants of assets accumulation and consumption expenditures, but did not control for endogeneity. As such, econometric estimates of the parameters are probably not robust. Since BRAC conducted two major impact studies in the 90s, the authors of the second impact study could have extensively analysed the effect of RDP credit at the household and individual levels using panel data. Panel data was not fully utilized. However, both the impact studies of BRAC provided a comprehensive set of information on the nature and process of impact of RDP credit and other inputs on poverty reduction. The ndings could
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be made more credible with more use of econometric techniques. Case studies offer insight into the process of impact. Finally the PKSF study contained both descriptive and econometric analyses. The strength of the study is its disaggregated analysis, and showed that effective inferences on impact outcomes could be made even without a well-dened and sound non-participation control group. Participating poor households were classied into regular participation, complete dropout, recent dropout, occasional participation, new members and nonparticipating control households. Such disaggregation enabled the authors to provide deeper analysis of the nature and the process of impact of micro credit at the household and individual levels. By and large, a multiple regression technique was used for parameter estimates. As the study was conducted over a three-year period, the authors in most cases used panel data for analysis. How different are the results? The results are basically similar. Micro-credit does matter in poverty reduction. The extent of poverty reduction because of micro credit has been estimated to be around 5 per cent for the participating households. This is more or less consistent in all the three major studies conducted in Bangladesh. Micro-credit does have a positive impact on income, consumption expenditures, self-employment, female labour, and asset accumulation as evident from the studies conducted in Bangladesh. The impact was more pronounced for the female borrowers. The ndings of micro-credit impact in Peru are mixed. Micro-credit made an impact on enterprise prot, and increase in income and more diversication of income at the household level. But no impact at the household level was found on household assets and childrens education. These results are different from Bangladesh. This has been basically due to the economic recession that Peru experienced in 199798. Micro-credit borrowers could sustain more than the non-participating households. That means, extreme externalities and/or natural calamities may outweigh the extent of positive impact of micro credit at the household level. When it does, it also affects the process of empowerment of women. In the Peru study, by and large, there was no positive impact of micro credit at the individual level. But in the Bangladesh studies, there are evidences of positive impact of credit at the individual level. Credit has empowered rural women, increased mobility and provided decision-making authority in material well-being, contraceptive use, and increased self-esteem. These ndings are common in Bangladesh (for example, Farashuddin et al., 1998; Hashemi et al., 1996; Pitt et al., 2003). Although the ndings that emerged from the review of major studies are more or less similar, the validity of the impact remains a question since neither of the studies could tackle the issue of fungibility, and separate out the effects of informal, formal and microcredit at the household level. This is particularly an issue in impact studies conducted in Bangladesh when more than one-third of the micro-credit borrowers borrow from informal market, and about one-sixth borrow from the formal credit market (Khandker, 1998a; Zohir et al., 2001; Halder, 1998; Khalily et al., 2000; Khalily, 1995). None of the three major studies conducted in Bangladesh could address the issue of access of poor households to multiple sources of credit in assessing impact of micro credit at the household level. As a result, the ndings of the studies may always be questionable. For example, all the three major studies reported that micro credit did have impact on consumption expenditures, but it is not clear whether it was due to borrowing from informal sources or formal sources or from increase in income due to micro-credit intervention.
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The issue of fungibility is more important than the issues of selection bias and endogeneity in accurate assessment of impact of micronance. The issue of selection bias is resolved with the use of panel data. Even in the cross-sectional studies, it can as well be efciently resolved with appropriate identication of the household and individual characteristics in the econometric models. The issue of endogeneity, as long as it is recognized, is tackled through application of appropriate econometric techniques. Although difcult, fungibility is not intractable. It ought to be handled in impact studies. Disaggregated analysis by access to different sources of credit like households with microcredit only, households with micro-credit and formal bank credit only, households with micro-credit and informal credit only and households with access to all sources of credit may enable to derive implication of micronance quite clearly. Both descriptive and case studies as well as econometric approaches can be applied in such a situation. Similarly, as used by Khandker and Faruquee, 2001, considering credit as endogenous, predicted value of credit along with instrumental variables can be used in the function of welfare outcomes. Finally, household economic portfolio approach may also be applied to control for fungibility.

RURAL FINANCIAL MARKET AND INSTITUTIONAL EFFICIENCY: MOSTLY FORGOTTEN PART IN IMPACT STUDIES Amidst euphoria over positive impact of micro-credit on poverty reduction and improvement in quality life of the poor households, the forgotten part has been development of rural nancial markets and institutional efciency of micronance institutions. Robinson noted two approaches to micronanceimpact approach and nancial system approach. Impact approach deals with impact analysis on the demand side. The nancial system approach focuses on efcient allocation of resources, institutional development, costeffective operation, nancial resource mobilization, and sustainability of micronance institutions within the legal framework. The advocates of the impact approach tend to argue that sustainability of MFIs will undermine the poverty-focus. They probably fail to recognize the fact that provision of micronance for the poor households will discontinue when MFIs become non-sustainable and/or when cheap funds will not be available. Sustainability perception makes MFIs costeffective and competitive, and is likely to ensure continuity in the provision for micronance for the poor households. Ultimately, poor households will be the beneciaries.

IMPACT OF MICROFINANCE ON INSTITUTIONAL SUSTAINABILITY Sustainability is loosely dened as the ability of the MFIs to pay for cost out of its revenue generated. This state is referred to as nancial sustainability. Any MFI that generates positive prot is nancially sustainable. As most MFIs are heavily subsidized, nancial sustainability does not reect real prot. As such, professionals tend to argue that sustainability should account for opportunity cost of cheap funds. This is usually referred to as economic sustainability. High transaction cost of providing nancial services at the doorsteps of borrowers and limited size of operation (limited to number of clients) make the process of ensuring sustainability difcult. But sustainability can be achieved through expansion of loan
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volume, diversication of loan portfolios, increase in cost efciency and loan productivity, training of clients and employees, institutional development, and increase in lending interest rate to cover transaction cost of optimum loan production. There are only a few studies that have addressed institutional efciency from the perspective of rural nancial market development in Bangladesh (for example, Khandker et al., 1995; Khalily et al., 2000; Yaron, 1992; Schreiner, 2001). Khandker et al. (1995) showed that although transaction cost of providing nancial services is high because of loan size, Grameen branches demonstrated increasing cost efciency. Similar ndings were found for BRAC in Khandker and Khalily (1996). Khalily et al. showed higher degree of cost efciency for Grameen Bank and ASA in Bangladesh. Yaron (1992) noted declining cost of loan production due to expansion in outreach and increase in loan size. Consequently, Grameen Bank, ASA and BRAC are nancially protable. Schreiner found Grameen Bank cost effective. Subsidy occupies a signicant position in the analyses. None of the leading MFIs (Grameen Bank, ASA and BRAC) is economically sustainable. The process could perhaps be improved had there been lesser degree of dependency on cheap funds and legal entity of the MFIs. Impact of Cheap Fund on Operating Cost Cheap funds do have adverse impact on the behaviour of MFIs as in formal nancial markets. Borrowers of micro-credit pay a higher interest rate. Therefore, they are not subsidized. Actually institutions are subsidized. This subsidy inuences behavior of top management. It is well documented in the literature that cheap funds distort efcient allocation of funding, increases default cost and operating costs and affect viability of lenders (Adams et al., 1984; Von Pischke et al., 1983). None of the MFIs has any ownership structure that will provide sufcient incentives for the management or CEO. With the exception of Grameen Bank, no MFI is equity-based; even in the Grameen Bank the management does not have any equity interest. In the absence of ownership-based incentive structure, what is the utility function of the CEOs or top executives? Such question is quite relevant from the perspective of making the MFIs competitive and efcient. It is well documented in the literature that top management will have expense preference behavior in the non-equity-based organizations. This will be more relevant when cheap funds dominate organizational nance. In a study, Khalily and Imam (2001) showed that average salary per employee for the more subsidy-dependent MFIs is higher than that of less-subsidy dependent MFIs. This has happened not because of more donordependency but because of subsidized nance and non equity-based interest of the top management. In the process, sustainability takes a long walk. Impact of Micronance on Rural Formal Financial Markets and Local Economy No study has been conducted on impact of micronance on rural formal nancial market development. As such, true impact of micronance on growth and development of formal nancial markets as well as rural economy is unknown. There will be several plausible impacts of micronance on rural formal nancial markets and local economy. First, rural deposits with formal banks will increase directly because of increase in net member-savings. In Bangladesh, rural formal deposits increased from Taka 46.2 billion in
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Table 2. Distribution of rural bank branches and deposit mobilization 199091
Total No. of Rural Bank Branches Rural deposits (Billion Taka) Rural Advances (Billion Taka) Ratio of Advances-Deposits Average rural deposits per branch (Taka Million) Source: Bangladesh Bank and authors own calculation. 3685 46.24 49.26 1.065 12.44

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200001
3693 173.85 100.29 0.576 47.24

Table 3. Year
199899 199900 200001

Rural credit in rural nancial markets in Bangladesh (Taka in Billion) Agricultural credit
32.45 34.74 36.30

Small and micro credit

7.52 5.54 6.70

Total credit
39.97 40.28 43.00

Small and micro credit as % of Total

18.81 13.76 15.58

Source: Bangladesh Bank and authors own calculation.

199091 to Taka 173.8 billion in 200002 (Table 2), while net member-savings in 2000 01 was Taka 24.2 billion. This is direct impact. Second, deposits wil probably increase rural deposits mobilization because of income impact of micro-credit. A total of Taka 365 billion has been disbursed as micro credit in Bangladesh during the past decade. This is likely to have impact on rural deposits mobilization in formal nancial market. Third, formal bank credit deepening is likely to increase, ceteris paribus. Credit deepening (rural advances as percentage of rural deposits) decreased from from 1.06 in 199091 to 0.576 in 200001, although absolute amount of rural deposits and rural advances increased. That means, a signicant portion of rural deposits is being transferred to urban areas. As such, expected rate of impact on rural economy will be lesser. Fourth, the provision for micronance and the production technology used by MFIs do have a positive impact on the loan portfolio. Formal banks could not lend to assetless poor households because their traditional collateral-based production technology was not appropriate. But the micronance experience of MFIs is likely to introduce formal banks to new collateral-less group-based production technology. This technology has enabled them to direct micro loans to poor households. In 200001, formal banks disbursed a total of 42.2 billion including Taka 6.9 billion for small and micro loans (Table 3). These plausible impacts together would have impact on viability or sustainability of formal rural bank branches as well as local economic development. These are wider impacts. Real impact depends on direction of impact in each of the cases as mentioned above. Johnson has argued for assessing wider impact of micronance on nancial markets (1998) and has executed that approach in her article in this volume.

Efcient Use of Financial Resources: Social CostBenet of MicroFinance Programme Micronance is not the only intervention for poverty reduction. There are other interventions. They are formal bank rural credit, food-for-works programmes, and vulnerable
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Table 4. Social costbenet of alternative interventions for poverty reduction Costbenet ratio
1.48 2.59 4.88 3.26 1.54 2.62 1.71

Programme
Grameen Bank BRAC BKB RAKUB Vulnerable Group Development Food-for-Work (Care) Food-for-Work (World Food Programme) Source: Khandker, 1998a.

group development. What programmes are more effective? This question has not been addressed in most of the studies. Khandker (1998a) has systematically addressed the question. He compared the costsbenets of Grameen Bank and BRAC with that of other interventions (BKB, RAKUB, Food-for-Works programmes). Social cost is the net subsidy derived from cheap funds. Benets were derived for BRAC and Grameen Bank based on marginal returns to borrowing. Khandker calculated the marginal return based on marginal return to consumption. He estimated, using two-stage least-squares regression, marginal return to formal borrowing. For the food for-work programmes, cost of one ton of grain was considered as cost while income transfer was considered as benet. Social costsbenets of different interventions for poverty reduction are reported in Table 4. Grameen Bank was the most cost-effective programme generating higher social benet. Two agricultural development banks (BKB and RAKUB) were the most costly programme. The costbenet ratios for the banks were 4.88 and 3.26 respectively, as against 1.48 for Grameen Bank and 2.59 for BRAC. However, the least cost-effective was foodfor-works programme. Nevertheless, the programme cannot be considered, as argued by the author, as the most effective anti-poverty programme as it does not reach all targeted poor households and it does not create opportunities to poor households for self-employment. Thus, despite the fact that transaction cost of micronance programme is very high, the programme is most effective in terms of social benets generated.

SUMMARY AND CONCLUSION During the past decades, quite a large number of studies were conducted on the impact of micro-credit at the household, individual and institutional levels. But most of the studies were focused on inter-and intra-household impact. Impact assessment of credit is difcult for several reasons: (i) selection bias; (ii) endogeneity; and (iii) fungibility of money. Given these problems, an appropriate methodology is required to tackle these problems. In the literature, three major approaches are foundeconometric, descriptive and case studies. Descriptive and case studies provide good understanding of the nature and process of impact-creation of micro-credit. No major implications can be derived for any policy implications, as these studies do not generate any sound estimate of the extent or degree of impact-outcomes. In this context, econometric approach is superior. But not all the econometric studies tackled all the three problems of impact assessment. Khandker used a maximum likelihood method to jointly determine the demand for credit and impact
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outcomes of micro-credit in Bangladesh. The major limitation was the failure to tackle the problem of fungibility of money. Dunn and Arbuckle (2001) used a household economic portfolio framework to econometrically estimate impact-outcomes in Peru. The approach tackles the problem of fungibility in a limited way. The ndings of the econometric, descriptive and case studies conducted in Bangladesh on the impact assessment of micro-credit are quite consistent in terms of direction of impact. The results of the descriptive and case studies are consistent when they are also derived from the econometric studies. At the household level, positive impacts are found on poverty reduction, income change, consumption expenditure, net worth, assets accumulation, childrens schooling at the household level, and womens empowerment at the individual level. Around 5 per cent of the participating households rose annually above poverty line. Women were more empowered than before because of their increasing command over nancial resources, participation in the investment, childrens education, contraceptive use, increasing mobility and self-esteem. These results are consistently found in all the studies. The ndings of the Peru study were not similar. Micro-credit, through increase in enterprise prots, contributed to increase in income and income diversication and consumption expenditures. Participating households could sustain themselves better in severe economic recession than the non-participating households. At the individual level, the ndings were mixed. Females had control over nancial decisions but did not achieve self-esteem and respect from others. These results suggest increasing ability of the participating households to cope with adverse economic situations, and perhaps the nature, process and extent of impact-outcomes may vary because of socio-cultural factors. Micronance is not the only anti-poverty strategy. There are others like food-for-works programmes and small loan programmes of formal banks. Which strategy should be pursued for effective poverty reduction? This requires costbenet analysis of alternative interventions. Descriptive and case studies fall short of addressing this question. Econometric approach provides better result, as it requires econometric-estimates of marginal and average return to borrowing. Khandkers study is the only one that estimated the cost benet ratio of alternative anti-poverty interventions. He showed that micronance programmes are more cost-effective in relation to social benets than those of publicsector agricultural development banks. Hence, micro nance programmes like Grameen Bank and BRAC generate higher positive welfare gains. There is no doubt that demand-side analysis of the impact assessment studies show positive impact on poverty reduction and the household and individual level outcomes. However, these ndings have implication for continuity of the programmes. But long run sustaining nancing of poverty reduction programmes requires sustainability of the micro nance institutions. This has been to a great extent forgotten in the impact studies. This may be costly. MFIs are subsidized. Subsidy inuences the behavior of lenders, but not of the borrowers. Khalily and others showed that top management of more subsidized institutions have higher expenditure preferences than the less subsidized institutions. Lack of ownership contributes to this. As such, institutional sustainability is affected. Resources are inefciently allocated. More subsidized institutions are far short of sustainability, aggravated by their high transaction costs of lending. However, empirical evidences extensively support the notion that MFIs can, if properly managed, operate protably and efciently. Because of different methodologies used in different studies and different approach to modeling, the parameter estimates are different. In all the major studies, the extent of
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impact varies but the results are same in terms of direction of impact. What are the implications of these ndings? It adds to the knowledge that micro-credit positively contributes to poverty reduction, and MFIs can operate protably and with higher degree of cost efciency. The users of impact ndings are basically government, international agencies, professionals, donors, MFIs and regulators. Hulme has rightly argued that impact studies do matter to the donors, not to the MFIs. However, government and international agencies would be more interested for its policy decisions on the extent of poverty reduction and the process through which micronance contributes to such poverty reduction. There may be several potential implications of the impact ndings at the household and individual levels for the government. First, microenterprises are the basic process through which micro-credit contributes to household and individual level impacts. The nature of enterprises invested in may have forward linkages with ample opportunities for employment creation. On the other hand, the nature of investment, for example trading, may not have sustainable impact. As such, an analysis of the impact through microenterpriseinvestment may have policy implications for promotion of desired type of microenterprises with potentials for growth. Second, since poverty reduction is the end-outcome of micronance programme, government and international agencies would be interested in the estimates of the extent of poverty reduction due to micronance. This will enable the government to expand necessary complementary support policies (like socio-economic infrastructures) to ameliorate returns to micro-credit investment. Third, the MFIs, because of their effective network and the approach, have proved effective in enhancing the level of womens empowerment and childrens education in rural areas. Hence, the government may take lessons from such experiences and strengthen its social institutions for higher level of utility of the government programmes for women empowerment and expansion of education-facilities for the rural poor. In addition, it may strengthen the efforts of MFIs in improving level of womens empowerment and child education. In recent years, impact studies on the demand side have used panel data. This resolves the issue of selection bias and makes the life of researchers simple. But the fungibility issue really puts the impact ndings on the line. Validity of the quantication of impacts is not free from any question. Which methodology is appropriate and how different are the results? This can be done only through applying different approaches on the same data set. Impact studies on the demand side are costly. As such, policymakers and professionals would expect the impact assessment to be accurate for any policy decisions. Impact assessments on the demand side have two major possible implicationsknowledge creation, and costbenet analysis of micronance as an anti-poverty strategy. Money has changed the lives of poor households and hard-working poor women. Not all dimensions inuenced by money or micro-credit are quantiable. As such, quantitative approaches do not provide complete assessment of impact-outcomes. The knowledgecreation impact studies should adopt both quantitative and case study approaches for meaningful insights. Mosley (1997) has rightly argued for intensive case study for better understanding of the nature of impact and of the causal process through which microcredit inuences outcomes. Micronance experiences on the supply side have generated several important ndingscollateral-less group-based production technology minimizes default cost and institutions are able to operate protably with higher degree of member savings mobilization. These ndings do have implications for the development of rural nancial markets. First, formal banks may adopt micronance production technology to improve its
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efciency and performance. Formal lenders in a limited way have taken a lesson from MFIs regarding production technology. Now formal banks produce collateral-free small and micro loans to the poor households and small farmers in Bangladesh. Second, formal banks may also introduce innovative savings schemes to mobilize savings from the poor households. Third, in the absence of efcient formal nancial markets, the government of Bangladesh within some regulatory framework can allow the MFIs to emerge as formal institutions to operate in rural nancial markets. This will enable the rural households to have access to a wide set of nancial services. Fourth, a formal process of inter-linkage between MFIs and formal banks should be introduced to offer nancial services to the rural households at least cost. Quite a large number of impact studies have been conducted in Bangladesh. We have more knowledge about intra- and inter-household level impact of micro-credit. But knowledge is more or less absent on the knowledge-creation of impact studies on the supply side. Impact should be viewed in a broader context. Macro economy and nancial market developments should be at the forefront of the future impact research. While micro-credit positively impacts household well-being, there should not be any distortion on the supply side. Otherwise, history will repeat. Cheap funds will destroy nancial markets and institutions as they have in the case of public sector banks in Bangladesh. This should be the lesson for future rural nancial market development and sustainable institutional development for continuity in the provision for nancial services for the hard-working poor households.

REFERENCES
Adams DW, Graham DH, Von Pischke JD (eds). 1984. Undermining Rural Development with Cheap Credit. Westview Press: Colorado. The AIMS Team. 2001. Conceptual framework for assessing the impacts of microenterprise services, USAID. Barnes C, Sebstad J. 2000. Guidelines for micronance impact assessments. Discussion paper prepared for the CGAP 3 Virtual Meeeting, March. Braverman, Avishay and Guasch JL. 1989. Rural Credit in LDCs: issues and evidences. Journal of Economic Development (Korea) 14: 734. Chen MA, Dunn E. 1996. Household economic portfolios. Report prepared under Assessing the impact of Microenterprise services, USAID. Coleman BE. 1999. The impact of group lending in northeast ThailandSpecial Issue on Group Lending. Journal of Development Studies 60: 105142. David CC, Meyer RL. 1983. Measuring the farm level impacts of agricultural loans. In Rural Financial Markets in Developing Countries, Von Pischke JD, Adams DW, Donals G (eds). The Johns Hopkins University Press: Baltimore. Dunn E, Arbuckle JG Jr. 2001. The impacts of microcredit: a case study from Peru AIMS, USAID. Farashuddin F, Shahnuj Akter AH, Banu D. 1998. Empowerment of Women. In Husain AMM (ed.). 1998. BRAC, Dhaka. Gaile GL, Foster J. 1996. Review of methodological approaches to the study of the impact of microenterprise credit programmes. Report prepared under Assesing the Impact of Microenterprise services, USAID. Halder SR. 1998. Measurement of poverty and its correlates. In Husain AMM (ed.). 1998. BRAC, Dhaka.
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