Microfinance has virtually swept over rural Bangladesh with the help of thousands of microfinance institutions (MFIs). Some of these institutions are very big and some are very small but together they account for about 60 per cent of total rural credit supply - flowing from both informal and formal sources. Ipso facto, an assessment of major transformation taking place in the microfinance sector is necessary to glean its impact on rural Bangladesh. As revealed by available information, some of the shining statistics relating to the past periods are as follows: MFIs started their journey providing micro loan of Tk.1,000; today, they provide loans as high as Taka one million (average Tk.24,000); membership has increased to 34 million in 2014; annual disbursement went up 15 times and net savings by 17 times, so on and so forth. Available empirics show that more than half of the rural population has been covered by microfinance. A recent estimate shows that more than half of rural households have taken microfinance at some stage in their lives, and almost half of households reported to be current borrowers.
Apparently, microfinance in Bangladesh is a favourite subject of research. But most of researchers use a partial equilibrium framework to analyse its impacts on the poor. A growing body of evidences, embodied in a number of research papers, shows that increased access to credit and savings has had a positive impact on poverty alleviation, income and return on investment. Shahid Khandaker of the World Bank and others have shown that with access to credit alone, some 2.5 million households graduated sustainably from poverty by the end of 2010. S.R. Osmani also documented that by improving the wealth level of borrowers, microfinance contributed to 29 per cent reduction in poverty compared to the counterfactual scenario in which there was no microfinance at all. While the total loans through microfinance rose from a mole to a mountain, there seems to be little research evidence in terms of its contribution to the Gross Domestic Product (GDP). The reason is perhaps not far to seek.
As mentioned earlier, most of the researches on microfinance undertaken so far was of partial equilibrium nature, and therefore, is silent about its indirect and induced effects on the national economy. However, Selim Raihan, S.R. Osmani and M.A. Baqui Khalily - three well-known economists of the country - seemingly broke the 'silence' with their first attempt to overcome this limitation. They employed a general equilibrium framework to look at direct as well as indirect impacts of microfinance throughout the economy. "For this purpose, the study uses a computable general equilibrium (CGE) model based on an updated version of the Social Accounting Matrix (SAM) of Bangladesh with the base year of 2012. The model is simulated to derive a measure of GDP that would have been obtained in Bangladesh in the counterfactual scenario in which there were no microfinance at all".
Microfinance is used for a variety of reasons including, say, enterprise financing, asset accumulation, consumption, meeting unexpected shocks etc. But the study by Raihan et al. assumed that only the part of microfinance that adds to the capital stock (both fixed and working capital) would contribute to the GDP by enhancing the capacity to generate more goods and services. "As such, only the share of microfinance devoted to enterprise financing and housing development was considered relevant for the present study… By considering only the capital-augmenting part of microfinance, it was possible to introduce microfinance in the CGE model as a part of the capital stock of the country. We thus made a distinction between MFI capital and non-MFI capital. By combining household-level information with national-level data, we estimated that MFI capital accounted for some 9.9 per cent of the total capital stock of the country in 2012".
What would be the GDP of Bangladesh if this MFI capital did not exist? The difference between GDP with and without MFI capital was taken as contribution of MFIs contribution to GDP. Deriving a range of estimates by using alternative assumptions about how labour market behaves, the researchers came to the conclusion that microfinance has contributed in the range of 8.9-11.9 per cent to the GDP and 12.6-16.6 to the rural GDP (assuming rural GDP is 60 per cent of total GDP). The authors are of the view that this contribution has two parts: (a) a direct effect of producing goods and services where microcredit is used for productive purposes for welfare of recipient households and (b) an indirect general equilibrium effect on the rest of the non-recipient actors. The latter effect is channeled through changing the prices of labour and capital. For example, by adding to the capital stock, it is viewed that microfinance first brings down the effective price of capital. With the passage of time and as producers substitute cheaper capital for labour, the effective price of labour also falls. "Both reductions then reduce the cost of production in all sectors of the economy, albeit to a varying degree which then stimulates more production of goods and services".
However, the authors reckon that magnitude of the contribution to GDP estimated by them could have been conservative as some important spillovers were missed out. For example, (a) microfinance enables underemployed people to make fuller utilisation of time through self-employment -which appears to be a tall task to capture, (b) It is not only investment but also consumption that adds to GDP as consumption smoothing encourages borrowers to undertake high-return but riskier investments; (c) higher income enables borrowers to spend more on education and health and thus form human capital, and finally (d) greater empowerment of women.
The writer is a former Professor of Economics at Jahangirnagar University.
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