Microcredit Client Survey - A Brief Review

While this was not necessarily related to Islamic finance, it caught my attention because the March issue of the newsletter focuses on developing a halal microfinance model. This paper provides an example of some issues related to measuring outcomes of microcredit programs.

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Short Review of:
Ahmad, Qazi Kholiquzzaman. 2007. "Socio-Economic and Indebtedness-Related Impact of Micro-Credit in Bangladesh" The University Press Limited, Dhaka.

Available online through International Union for Conservation of Nature and Natural Resources (IUCN) in Word format

This report, paid for by Action Aid Bangladesh, an anti-poverty group, and written by Action Aid and Bangladesh Unnayan Parishad (BUP), a self-described "multi-disciplinary research organization" presents the results of interviews with 2,501 people across Bangladesh with more than 4 years of borrowing history from microfinance insitutions (MFIs). Of the 2,501 interviewees, over 99 percent were women and most were married women. 87% of those interviewed borrowed less than Taka 20,000 (US$290) and a majority (56.1%) borrowed less than Taka 10,000 (US$144).

The report takes, I believe, an overly critical view of the effect MFIs and microcredit in general can have. They appear to base their judgements on an idealistic view that microfinancing alone should be able to help the majority of the people they interviewed as measured by becoming landowners, becoming more educated, owning cultivated land and large livestock, food intake, access to sanitation and access to health services. While the ultimate goal is to raise the level of income of MFI clients, it will not happen in just the 30 year period in which MFIs have operated in Bangladesh. There is also an element to which the pool of those interviewed will tend to have worse outcomes than the total pool of MFI clients. By only interviewing those with 4 years or more of microcredit history, the study excludes those who are able to build their assets so they no longer need to rely on micro-credit loans. One metric in particular will demonstrate why this problem is likely to be present. Most MFIs focus their services on the landless poor so their client base will typically be made up of a high number of landless (or those owning very small amounts of land) and this statistic will stay relatively constant over the life of the institution as some borrowers are able to buy land, they will drop out of the client base of the MFI as new landless clients come in. One cannot necessarily assume that because "there is virtually no change in the pattern of ownership of homestead land, with about 92% owning less than 25 decimals, both now and before enrollment" that microcredit is unsuccessful in reducing poverty (p. 32).

MFIs are not a silver bullet cure for poverty, nor are they perfect or applicable to all situations (e.g., some Muslims may not use microfinance because it is based on interest, which many believe is prohibitted as riba). However, microfinance provides a viable tool to fight poverty and if a halal microfinance product is developed, could be an added way to help the poor improve their own economic and social status.