Vol 24. Num 1. 2022. Article 1 - 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 the last two decades. The experience of Bangladesh has played an important role in this debate. Most of the existing studies on Bangladesh focus on the impact of microfinance on poverty and empowerment of women. We provide a discussion of the recent literature on two relatively neglected aspects: the impacts on moneylenders and the coping ability of households facing adverse shocks such as flood and seasonal famine (Monga). The available evidence suggests that the microfinance NGOs in Bangladesh helped free many households from the "clutches" of moneylenders, contradicting the claim of some critics that microfinance exacerbates the dependence on moneylenders. The likelihood that a household goes to moneylenders for credit declines by about 70 percent once it becomes a member of a microfinance program. However, the evidence also suggests that moneylender interest rates go 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 floods and the Monga. But microfinance membership does not reduce the propensity to sell labor in advance in the lean season and may not help a household finance short-term migration to urban labor markets in response to a shock.