Impact of Microfinance Programmes on Poverty Alleviation in Bangladesh: Evidence from Household-Level Data

Abstract

The study analyzes the effect of the microfinance programme on poverty alleviation in the context of Bangladesh with a special focus on the mediating effect of household income generating capacity. The study is driven by the ongoing relevance of MFIs as a financial inclusion tool for poor households who have limited access to formal financial services and productive capital. The study examines from a household level if or how household economic welfare is enhanced by the participation in microfinance programmes. The empirical analysis is based on the baseline regression analysis and the propensity score matching method to overcome observable differences between the participants and non-participants of microfinance. In turn, mediation analysis is used to analyze whether boosting income-earning potential is an important mechanism connecting the microfinance experience and poverty reduction. It shows that the participation in microfinance is positively and significantly related to welfare of the households. The propensity score matching results also show a positive treatment effect, consistent with the alternative specifications in the analyses, implying that, on average, microfinance clients enjoy higher welfare than similar non-participants households. Results from mediation analysis show that participation in microfinance significantly increases income earning potential, thereby contributing to increase in household welfare. The indirect effect is significant, and there is also an indirect effect that is still significant.An indirect effect is significant, and there is also a direct effect that is still significant. The main conclusions are robust with respect to alternative specifications and poverty measures. The results of the heterogeneity analysis also reveal that the effect is more pronounced among households in rural areas, among poor households and among female-headed households and less-educated households. The study finds that when financial access is turned into viable income generating activities, Microfinance can play a significant role in poverty reduction in Bangladesh. The results indicate that microfinance policies need to shift from credit delivery to a comprehensive package that includes supportive financial education and entrepreneurship development as well as productive investment mechanisms.