Elsevier

World Development

Volume 27, Issue 2, February 1999, Pages 419-430
World Development

Demystifying Nonparticipation in Microcredit: A Population-Based Analysis

https://doi.org/10.1016/S0305-750X(98)00134-XGet rights and content

Abstract

Given the current popularity of microcredit schemes as a means of poverty alleviation, their accessibility to the poorest is of obvious concern. This paper examines a targeted microcredit program in Bangladesh to assess its coverage among the poor, and to identify program- and client-related barriers impeding participation. A population survey of over 24,000 households reveals that although three-quarters are eligible for microcredit, less than one-quarter participate. Rates of participation in microcredit are higher among poorer households. Multivariate analysis identifies lack of female education, small household size and landlessness as risk factors for nonparticipation, based on a 7% random sample of this population. The implications of these findings for poverty alleviation policies and programs are discussed.

Introduction

Although lending to the poor has long been a tool for poverty alleviation, in the last five years microcredit has become the mantra of development institutions worldwide. The endorsement given to microcredit by leaders such as US President Bill Clinton, its adoption as a core strategy to alleviate poverty by the World Bank, and the recent global summit on microcredit are indicative of the current preeminence of this anti-poverty strategy. This enthusiasm stems from the assessment that microcredit interventions not only benefit the poor but do so with efficiency and accountability. In addition to exhibiting exemplary performance in terms of loan repayment and financial sustainability (Hossein, 1989), emerging evidence has identified the positive impact of microcredit on household well-being (Pitt and Khandker, 1996; Mustafa et al., 1996), gender relations, and women's empowerment (Hashemi, Schuler and Riley, 1996).1

The world has been drawn to the promise of microcredit through the scope and success of programs undertaken by large nongovernmental organizations (NGOs) in Bangladesh. With the objective of breaking the vicious cycle of poverty (low capital, low productivity, low income, and low savings), a large number of these programs explicitly target the poorest (Pitt and Khandker, 1996).2 The poor are commonly identified through the application of standard “eligibility criteria” that reflect a widely agreed upon definition of those least able to access private credit markets due to economic and social constraints. In the context of rural South Asia, for example, women, the landless, and impoverished wage laborers generally constitute the target groups that eligibility criteria are designed to capture.

Criteria that successfully identify the poor, however, do not ensure equality of access to microcredit opportunities. Indeed, there is increasing anecdotal evidence that the poorest 20% of the population are effectively excluded from microcredit programs (Hulme and Mosely, 1996). Furthermore, there is concern that a new trend toward “minimalist microcredit” may exacerbate these exclusionary tendencies.3 Therefore, the examination of factors that prevent the poorest from being beneficiaries of microcredit is both timely and critical. As conceptualized in Table 1, differential participation rates may reflect endogenous characteristics of the credit program or of potential clients and their households. Singly or in combination, these factors work to prevent the eligible poor from taking advantage of microcredit opportunities.

With respect to program-related barriers, we first hypothesize that an insufficient supply of credit may hinder access to credit by the eligible poor. In other words, were there a greater supply of microcredit programs, more of the poor would participate. Membership requirements represent another feature of microcredit programs that pose a barrier to credit access. The majority of credit schemes require that clients attend credit group meetings, pay registration fees, begin to deposit monetary savings in an organised scheme, and undertake educational and planning activities. In the context of scarce resources, any of these obligations might prove impossible to fulfill. Furthermore, since the success of each self-selected credit group is dependent on the investment of time and energy of fellow members, considerations of social class, literacy, health status and other socio-cultural norms and practices may influence group decisions about member selection and credit-readiness (Noponen, 1992; Hulme and Mosely, 1996; Pitt and Khandker, 1996). Finally, institutional incentives may pose a program-related barrier to participation. Under pressure to meet target repayment goals and to respect the programs' self-financing principle, managers of microcredit programs may reject potential clients who are, or appear to represent, a credit liability (Hulme and Mosely, 1996).

We hypothesize five client-related barriers that prevent the eligible poor from receiving microcredit (Table 1). As described above, in addition to meeting eligibility criteria, program membership requires the payment of registration fees, attendance at weekly meetings and the accumulation of minimal savings. Participation assumes, therefore, that households possess sufficient resources to meet these demands: time to attend meetings; cash reserves for savings; and energy and motivation for education and planning activities (Montogomery, 1996). Participation is further constrained among potential clients suffering from ill-health or other crises that limit their capacity to acquire and utilize credit (Evans, 1989; Pryer, 1989; Rahman et al., 1992). Similarly, the socioeconomic disadvantages experienced by female-headed households, ranging from economic discrimination to social stigmatization and isolation, impede their ability to meet the resource requirements for participation in microcredit schemes (Rahman et al., 1992; Chen, 1995; Buvinic and Rao Gupta, 1997). Lack of education also compromises the ability of potential clients to understand the benefits of credit; assert their desire to join the program; function within a peer group; and successfully utilize credit. Finally, nonparticipation might simply be a function of individual or household preferences that deem that credit is not in their best short or long-term interest.

Despite concerns that some of these barriers are impeding the participation of the poorest in credit-based poverty alleviation programs (Mustafa et al., 1996; Hoff and Stiglitz, 1990; Montgomery, Bhattacharya and Hulme, 1996; Rogaly, 1996), to our knowledge, there has been no population-based study that measures the prevalence and nature of nonparticipation. To address this dearth in the literature, we use the case of a large microcredit program in Bangladesh to measure the extent to which targeted microcredit activities are actually reaching the poor, and to examine what (if any) are the defining characteristics of those who are not participating. We speculate how these characteristics may impede access, and discuss their implications for microcredit policy.4

Section snippets

The Case Study: BRAC's Rural Development Programme (RDP)

Bangladesh is renowned for the scope and richness of rural development work undertaken by the nongovernmental sector. Among the welter of NGO active in the country, BRAC ranks among the largest, along with Grameen Bank and Proshika. BRAC was established in 1972 by a group of Bangladeshi nationalists in response to the mass migration and resettlement of refugees following the War of Liberation. Since then its mandate has broadened to embrace and promote the welfare and development of the rural

Methods

Data for this study were collected in 1994. Sampling was based on an RDP survey of 32 Area Offices from which five were chosen according to that criteria that: (a) they were well-established (i.e. operational for more than five years); and (b) they were performing well, based on assessments of a variety of indicators including member attendance rates at VO meetings, average weekly savings, the prevalence of sanitary latrines, and participation in functional education training (BRAC, 1993).

Results

Table 3 classifies the 24,134 households in the population survey enumerated by the key informants according to Wealth Group. Wealth Group 1 constitutes households that are food secure and relatively well-off as indicated by asset and land ownership (>0.05 ha) and/or involvement in established businesses or professions. Wealth Group 2, who represent the moderately poor, experience periodic food insecurity, sell more than 100 days of labor per year, and possess few assets and little or no land

Discussion

From a population perspective, membership composition indicates that RDP is successful in involving the poorest. Fig. 1, Fig. 2 reveal that the poorest households (Wealth Group 3) in the population survey have the highest proportion of members and the highest rates of membership relative to less poor households (Wealth Groups 1 and 2). But only 27% of eligible households are members in an area where the prevalence of household poverty is very high (76%).

Conclusions

Two of the key observations in this study emerge from the population-based survey. First, poorer households are more likely to be BRAC members. Second, the majority of poor households are not participating in microcredit. This population perspective permits an appreciation of the magnitude of rural household poverty and its coverage by microcredit programs. The policy insights gained by these observations provide a strong argument for further population-based monitoring. For example, in the

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