Conclusions

The empirical analysis here demonstrates that participation in the Khushhali Bank’s microcredit program has positive impacts on both economic and social indicators of welfare, as well as income-generating activities, especially for the very poorest participants in the program. Particularly encouraging is the fact that the bank has generated these impacts while remaining focused on the goal of financial sustainability.

Although the microfinance program is not impacting consumption of either food or nonfood non-durable consumption, there is evidence that the program enables the very poorest of its borrowers to increase expenditure on their children’s education, perhaps affecting the finding that children those households are more likely to be enrolled in school.

Participation in the program overall also has positive impacts on non-expenditure indicators of children’s health. Participating households are more likely to seek medical treatment for their children’s health problems and more likely to seek trained professionals to provide that treatment. For the very poorest households, we see an increased likelihood of children receiving basic vaccinations.

The highest aggregate impacts of the program on income generating activities were to agriculture, and again these positive impacts were higher for the poorest borrowers. Participating households report higher value of outside sales of their agricultural products and the impact of the program on sales were again even higher for the very poorest borrowers. In addition, urban borrowers, 70% of whom are below the official poverty line, reported significantly higher sales and profits the more they had participated in the program.

These findings challenge what has become the conventional wisdom that microfinance is not an appropriate intervention for reaching the poorest of the poor. Although it should not be expected that all poor households would benefit from micro-loans, these findings demonstrate that even the poorest of the poor, those living at less than half the official poverty line, benefit from microcredit. The empirical analysis presented here shows that these very poor clients are already seeing positive impacts from participation in the program and are effectively using the loans to invest in their household enterprises and, through investments in the health and education of their children, the future of those enterprises; these positive poverty reduction effects have been achieved by an institution that is clearly profit-focused. This provides important evidence for the ongoing debate as to whether or not commercially-oriented microfinance institutions can indeed reach the very poor.

Comment(s)

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1. Khan Hidayat Ullah
   (posted 23 November 2006 / 10:14:28 PM)
   
   Econometric Model Selection:
   
   I went through your paper and really liked the approach adopted by you while found your results interesting as well.
   
   I have one comment to make. When it comes the components of microfinance pertaining to the term of loan, e.g., amount, duration and repayment mode, in practice these factors are determined by the both the borrower and lender through negotiation between line staff of MFI and Managers of CBOs. This results into adoption of resolution by members in joint meeting held by field staff MIF and CBO.
   
   Keeping these factors in view, the claim that an explanatory variable relating to terms of micro-credit is exogenous becomes doubtful. This creates endogenity problems in the model and the results which are estimated by this model can not be claimed as unbiased.
   
   In you model you have used variables like amounts of loan and times of loans borrowed in past, which brings in endogenity problem in the model and leads to biased estimates, if I am correct? I would like to know how you addressed this problem in your econometric model. If not what kind of instrumental variable you intend to use in order to deal with situation will.