FORMS OF MICRO-CREDIT INTERVENTIONS AND COST-EFFECTIVENESS

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It is clear that experimentation and local variation are likely to be important

aspects of successful MFIs. A few studies have looked in detail at the impact

and cost effectiveness of different forms of intervention. For example, Park

and Ren (2001) look at the Chinese experience, drawing on household survey

data for 1997. They are able to compare three types of program based on

ownership characteristics – NGO-based, mixed programs and government

ownership. Whether in terms of conventional fi nancial criteria like repayment

rates, or measures of initial impact like targeting effectiveness, the NGO

programs appear to function best, with the government-run programs the

least successful.

Detailed mechanisms for micro-lending are examined for Thailand by

Kaboski and Townsend (2002) who look at different institutional variants

such as production credit groups, women’s groups, rice banks and buffalo

banks, as well as a variety of services including training and various savings

facilities. Of the forms of institution, allowing for a range of other factors,

women’s groups appear to have the largest positive impact on their members.

Of the services offered, training in conjunction with credit appears to work

well and the availability of savings facilities appears to be associated with

asset growth amongst households. Of the savings services regular ‘pledged

savings’ have the largest positive impact on numbers. This is likely to be due

to the use of savings as collateral for further loans either from the institution

itself or from other sources. However, since the poorest may not be in a

position to offer regular savings this also provides an explanation for why

they may benefi t relatively less from MFIs.12

Most studies of the impact of different forms of micro-finance do

not conduct a full cost-effectiveness analysis in order to judge both the

effectiveness of different alternatives and how micro-fi nance interventions

compare in effi ciency terms with other ways of reaching the poor. However,

there is often a general expectation that MFIs are an effective and effi cient

means of reaching the poor. For example, Wright (2000) argues that

‘microfi nance has a particular advantage over almost (and probably) all

other interventions’ in providing cost-effective and sustainable services to

the poor.

The early work by Khandker (1998) attempts to assess the cost-effectiveness

of micro-credit in Bangladesh (that is costs per taka of consumption for

the poor) as compared with more formal fi nancial institutions and other

poverty-targeted interventions. His data are summarized in Table 7.3. They

appear to be based on the assumption of a zero leakage rate to the non-poor.

The interesting result that emerges is that the Grameen Bank is considerably

more effective than BRAC and that, as expected, loans to female borrowers

are considerably more cost-effective than loans to males. Further, subsidies

to Grameen (but not to BRAC) appear to be a more cost-effective means

of reaching the poor than various food-for-work programs. However a

food-for-education scheme appeared very cost-effective relative to the foodfor-

work programs and to BRAC.13 Formal fi nancial institutions are less

cost-effective than Grameen for both female and male borrowers and less

cost-effective than BRAC in some, but not all, cases examined (Khandker,

1998: 134–9). The high fi gure for BRAC is in part due to the range of

services, such as training, offered in addition to micro-credit (see note 4),

but nonetheless if such services are essential to the success of micro-credit,

the inclusion of their cost in a cost–benefi t assessment of micro-credit is

legitimate.

It is interesting to note that Khandker does not conclude from this

that all subsidies to other poverty interventions should be withdrawn and

reallocated to micro-fi nance. Rather he points out that because participants

in micro-credit borrowing self-select (that is they judge that micro-credit

suits their particular needs, often for self-employed work) others amongst

the poor may not be able to benefi t. For this latter group other forms of

targeting will still be required.

Table 7.3 Cost effectiveness ratios:a Bangladesh early 1990s

Intervention Female Male All borrowers

Grameen Bank 0.91 1.48

BRAC 3.53 2.59

Agricultural Development Bank (BKB)b 4.88

Agricultural Development Bank (RAKUB)c 3.26

Vulnerable Group Development 1.54

Food-for-work (CARE)d 2.62

Food-for-work (World Food program) 1.71

Food-for-educatione 0.94 (1.79)

Notes:

a Ratio of costs to income gains to the poor.

b Bangladesh Krishi Bank.

c Rajshahi Krishi Unnayan Bank.

d Run by CARE on behalf of USAID.

e Source for this data is Wodon (1998); fi gure in brackets is the cost-effectiveness ratio for

the very poor.

Source: Khandker (1998), Tables 7.2 and 7.3 and Wodon (1998).

The above data provide ambiguous support for the idea that micro-fi nance

is a cost-effective means of generating income for the poor. The fi gures for

Grameen support this view, whilst those for BRAC do not. More recently a

couple of other estimates are available. Burgess and Pande (2003) examine

whether the pattern of commercial bank expansion in India, into rural

areas previously not served by banks, has impacted on rural poverty, and

their work allows a simple comparison with micro-fi nance. Their estimates

suggest that it costs Rs 2.72 to generate an additional rupee of income for

the poor via social banking programs. Compared with the data in Table

7.3 this ratio is higher than the cost-effectiveness ratio for Grameen, but

lower than that for BRAC.14

A further look at the effectiveness of Grameen is provided by Schreiner

(2003), who calculates the subsidy–lending ratio at 0.22 over the period

1983–97. This is not directly equivalent to the ratios in Table 7.3, but

assuming the same return to borrowing as in Khandker (1998) these fi gures

can be converted into a broadly equivalent ratio of cost to gains to the

poor of 1.15. This is consistent with the fi gures in Table 7.3 which would

need to be averaged to give an overall return to male and female borrowing

combined. The result confi rms Grameen as a relatively cost-effective form

of poverty intervention, although it says nothing about how the benefi ts

from its activities are distributed between the poor, the very poor and those

above the poverty line.