Reaching the Poor

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE 2033 K STREET, N.W. WASHINGTON, D.C. 20006-1002 PHONE: +1-202-862-5600 FAX: +1-202-467-4439 EMAIL: [email protected] WEB: www.ifpri.org In the last two decades, nongovernmental organizations (NGOs) in Bangladesh have provided millions of poor rural people with savings and credit services at low cost. With these services they have reduced poverty, and may have improved food security and nutrition and achieved positive social change as well. These NGOs have different structures, modes of operation, and program goals, and are not legally registered as banks. Unlike the formal financial intermediaries, such as nationalized commercial banks, that lend based on collateral—thus effectively excluding the poor—these microfinance institutions (MFIs) provide services to solidarity credit groups that poor community members create. Small groups (5 to 10 members) form larger groups that then procure financial services. The NGOs thus make use of joint liability, peer selection, and experience with repeated financial transactions to overcome the informational constraints in formal financial markets. The MFIs harness some of the strengths of local organizations while also practicing sound business management. Despite these programs and the increases in per capita income, widespread poverty and malnutrition continue to exist in Bangladesh. In 1997, the country was the eighteenth poorest in the world. The level of extreme poverty has hardly changed over time and the incidence of poverty is greater now in rural areas, where 50 percent of the households are landless and employment opportunities are low. The natural disasters Bangladesh experiences have caused even further setbacks in development. Given the relative success of the MFIs and the pressing need for further poverty alleviation, Manfred Zeller, Manohar Sharma, Akhter U. Ahmed, and Shahidur Rashid undertook a study to examine four issues: (1) The determinants of the formation and outreach of MFIs; (2) the credit group formation process, the determinants of program eligibility, and the implications of eligibility requirements for the structure, conduct, and performance of the groups; (3) the financial sustainability of the lending institutions; and (4) the effects of participation on household resource allocation, income generation, food and nonfood consumption, and the social attitudes and capacities of their members. In Group-Based Financial Institutions for the Rural Poor in Bangladesh: An Institutionaland Household-Level Analysis, the authors examine these issues by looking at the workings of three different institutions: the Bangladesh Rural Advancement Committee (BRAC), the Association for Social Advancement (ASA), and RangpurDinajpur Rural Services (RDRS). These NGOs represent, respectively, the three types of MFIs in Bangladesh: those that have transformed their financial programs into banks; those that collect savings and make loans, but rely on the wholesale functions of rural banking networks; and those that do not handle funds, but instead facilitate the formation of member groups and their linkage with banks.