The Correlation between Micro-Credit and Poverty Alleviation
in Bangladesh: An Empirical Analysis
Chowdhury Abdullah Al Mamun*, Nazmul Hasan** and Arif Rana***
This paper attempts to analyze the empirical correlation between
microfinance and poverty alleviation in Bangladesh. The findings
revealed that there is a significant relationship between microfinance and
poverty reduction; there is a significant difference between microfinance
and traditional rotating system; there is significant difference between
loan repayment by the women and poverty reduction and significant
difference between microfinance and the status of women in
Bangladesh. It argues that while microfinance has developed some
innovative management and business strategies, its impact on poverty
reduction remains in doubt. Further, determining how microfinance can
be used as an important vehicle to make an even larger and more critical
contribution to alleviating poverty is in need of more careful assessment.
JEL Classification: G21, O16, E24
Keywords: microfinance, poverty, employment, Bangladesh
Poverty is a pervasive problem in our society. Spanning across the world, poverty exists
in different levels and various forms. At the current threshold of $1.25 a day, the World
Bank estimates that around 25% of the population in developing regions lives below the
poverty line (United Nations, 2009). This figure translates to 1.3 billion people living in
poverty, or about 20% of the global population (The World Bank Group, 2010).
As the World Bank broadly defines it, poverty is a “pronounced deprivation in well-
being,” (as cited in Khandker & Haughton, 2009, p. 2). The poor are deprived of basic
necessities in life, such as food, shelter, clothing, and clean drinking water. They also
lack access to health care, quality education, and employment opportunities that are
important in improving their human capital and facilitating social mobility. Due to the
profound impact that poverty has on the poor’s well-being, efforts have been made by
various multilateral organizations, such as the United Nations, to address these
problems and combat poverty. Through the years, different poverty reduction strategies
and instruments have been developed in order to improve the poor’s standard of living
and help the people break the vicious cycle of poverty. One such
*Chowdhury Abdullah Al Mamun, School of Business, University of Information Technology and
Sciences, GA-37/1 Progoti Sarani, Baridhara J-Block, Dhaka 1212, Bangladesh. ,
**Assistant Professor Nazmul Hasan, Head of MBA Program, School of Business, University of
Information Technology and Sciences GA-37/1 Progoti Sarani, Baridhara J-Block, Dhaka 1212,
*** Associate Professor Arif Rana, School of Business, University of Information Technology and
Sciences, GA-37/1 Progoti Sarani, Baridhara J-Block, Dhaka 1212, Bangladesh. ,
(Hossain & Knight, 2008; Venkataramany & Bhasin, 2009; Chemin, 2008).
Microfinance is the provision of financial services to the poor, aiming to empower low-
income populations by providing them with access to credit and other financial services.
Through microfinance institutions (MFI), the poor can obtain collateral-free loans at
relatively low interest rates and use the money for creating microenterprises (small
businesses owned by poor people), funding children’s education, and improving homes,
among others. Aside from microcredit (small loans to the poor), MFIs have also
developed numerous financial products, such as micro-insurance and micro-mortgage
that are designed to accommodate the poor’s financial needs. Most of these institutions
have also required their clients to open up savings accounts, which could be used for
emergency and investment purposes (Carr & Tong, 2002, p. 82). Indeed, microfinance
has so much to offer to the poor that it has now become a global phenomenon (Carr &
Tong, 2002, p. 7).
Despite the success of microfinance in including the poor people in the financial sector,
critics claim that this antipoverty tool lacks hard data to prove its positive impact on
reducing poverty levels. Some researchers also question the real impact of
microfinance institutions (MFI) in women empowerment, and argue that assistance from
the public and private sectors must be made available to effectively improve the lives of
the poor. Others are also concerned at how these institutions would be able to fulfill
their social goals while trying to achieve long-term sustainability.
2. Research Questions
The following research questions are tested in the course of this study.
What is the significant difference between microfinance and poverty reduction?
What is the significant difference between microfinance and traditional savings
What are the differences between microfinance and traditional savings rotating
What is the difference between loan repayment and poverty reduction?
3. Literature Review
3.1 Micro-credit: Growth and Features
The popularity and success of microfinance are evidenced by the formation of large
microfinance institutions (MFI) across the world and the increased participation of non-
governmental organizations (NGO) in this growing industry. According to Pearl and
Phillips (2001), 7000 micro lenders currently exist all over the world, catering to about
twenty five million borrowers, of whom mostly are women living in rural areas (as cited
in Elahi & Danapoulos, 2004, p. 61). Multilateral organizations such as the World Bank
and UN Development Programme, have also recognized the potential of microfinance
as a poverty alleviation tool and have contributed significantly to develop its programs
(Midgley, 2008, p. 470). The United Nations has also declared 2005 as the
“International Year of Microcredit,” and openly acknowledges that provision of financial
services to low-income populations is an important step towards realizing its number
one Millennium Development Goal (MDG), which is to halve global poverty by 2015
(United Nations Capital Development Fund [UNCDF], 2005).
Microfinance’s worldwide recognition can also be credited to Muhammad Yunus,
founder of the Grameen Bank in Bangladesh and recipient of the 2006 Nobel Peace
Prize. Although microfinance was not his original idea, Yunus pioneered the
implementation of joint-liability groups as a substitute to tangible collaterals when
borrowing loans, and emphasized the role of women in managing credit and organizing
microenterprises (Engler, 2009, p. 82). He founded the Grameen Bank in the 1970s as
an effort to ameliorate the destitute poverty that plagued his country. He believes that
the poor possess an “entrepreneurial drive” and are equipped with “survival skills” that
allow them to become successful micro-entrepreneurs (Engler, 2009, p. 82). He also
asserts that to develop tools and services that would greatly benefit the poor, their
limitations must be carefully considered by institutions which fight poverty (Yunus, 2007,
p. 20). As of now his Grameen Bank has more than 1,000 branches and 6 million
members, and boasts a 98 percent repayment rate (Midgley, 2008, p. 471).
There is certainly much truth in what Yunus said about how MFIs should approach their
target income groups and accommodate the limitations of the poor. For instance, most
commercial banks believe that this portion of population is “unbankable” due to their
lack of financial resources and assets that can be put up as collateral. And so, more
often than not, the poor are excluded from the financial sector because banks are
unwilling to lend out loans and offer other financial services to this population group.
Most commercial banks believe that the poor entail high risks, and are more likely to
default on loans compared to middle and high-income individuals.
Microfinance, on the other hand, departs from traditional banking services, which only
target specific groups in the population. It eliminates the bureaucracies inherent in
conventional banking by simplifying paper work and forms, and establishing banking
centers in villages (Yunus, 2007, p. 20). Microfinance’s core principle lies on the
assumption that the poor people are motivated to do anything to move out of poverty
and better their lives.
Several key features of microfinance that differentiate it from commercial banking
procedures are outlined by Elahi and Demopoulos (2004). They mention five
characteristics of this poverty alleviation tool: 1) small loan size, which is determined by
micro lending institutions and dependent on the country’s socioeconomic development
2) focus on women borrowers, who have little access to credit 3) emphasis on the
utilization of loans to start microenterprises as they provide employment opportunities to
clients 4) absence of tangible collateral, and formation of joint-liability groups to enforce
payment, and 5) savings mobilization programs, which require borrowers to open
savings accounts and accumulate financial assets (Elahi & Danapoulos, 2004, p. 62).
Along with these key features, training and group meetings are also essential elements
in microfinance. Once an individual chooses to borrow loans from MFIs, she is required
to attend these activities and participate in capacity building programs.
Entrepreneurship and risk management skills, credit discipline, values formation,
information on health and hygiene, among others are discussed and taught in these
training sessions to equip the borrower with proper knowledge of effectively managing
her small business and aid her in everyday living (Dowla & Barua, 2006, pp. 18-19).
Through this approach, MFIs are not only able to provide financial capital to the poor,
but they are also able to promote a sense of responsibility and drive to achieve success
in entrepreneurial endeavors.
3.2 Benefits and Women Empowerment
Aside from obtaining access to credit and other financial services, and creating
microenterprises that provide employment, the poor also gain additional benefits that
contribute to their overall economic improvement and social mobility. In most third-world
countries in which MFIs operate, women empowerment is one of the most important
effects that microfinance generates in rural communities. By acquiring access to
financial capital and starting their own family business, women increase their decision-
making power in the household and are able to possess skills in entrepreneurship and
financial management. They gain more knowledge in terms of running their own source
of livelihood and do not remain as ordinary housewives solely tied to the responsibility
of taking care of their families. They start to play important roles in their communities
and receive respect from other people for proving their great capacity to effectively
manage resources and organize microenterprises. The benefits that women obtain from
microfinance are not only financial but also encompass gender empowerment and self-
actualization. In rural areas and villages, which are traditionally patriarchal, women are
given the opportunity to uplift their status in the society and prove their worth as capable
members of their community.
The poor in general experience social mobility through microfinance. As they acquire
access to credit and become included in the financial sector, they are able to improve
their economic status and increase their participation in the domestic (or even global)
market. Kathryn Imboden (2005) indicates in her research that there is a growing
number of literature that can support the positive relationship between financial sector
development and poverty alleviation. She notes that because financial sector
development contributes to economic growth, it indirectly aids in alleviating poverty.
Also, by providing access to finance, the financial sector has direct effects on the
economic condition of the poor (Imboden, 2005, p. 68).
Additionally, microfinance provides psychological benefits to its poor clients by
promoting a sense of “self-respect and dignity, much more than handouts and grants. .
.Success, self-respect and dignity are basic ingredients in overcoming the conviction
that they and their children are born losers, born to fail” (van Maanen, 2004, pp. 27-28).
Knowing that they are able to take out a loan, start their own business, and repay the
borrowed capital through their own efforts and hard work, the poor can convince
themselves that they are capable of doing something that could certainly change their
lives for the better. They do not merely depend on loan sharks or moneylenders, who
charge them for exorbitant interest rates, to finance their daily needs. Moreover, they
also do not have to constantly rely on welfare programs for financial support, as
becoming self-employed through their own businesses allows them to have a more
stable source of income. If effectively managed, these businesses could potentially
grow, resulting to a higher amount of earnings for the poor’s household. And so, utilizing
microloans to advance entrepreneurial endeavors makes the poor better off than simply
relying on welfare and high-interest loans from moneylenders. As the old adage goes,
“Give a man a fish and you feed him for a day. Teach a man how to fish and you feed
him for a lifetime.” Providing the poor with the right financial tools and knowledge to start
a microenterprise will help them long-term and allow them to become self-sustaining in
3.3 Criticisms and Issues
Like any other anti-poverty programs, microfinance is not without any controversy or
criticism with regards to its real impact on poverty levels. Despite anecdotal stories of
success and testimonies from female clients and other borrowers, a number of literature
argue that microfinance lacks hard, quantitative data that accurately measure significant
changes in the economic conditions of the poor (Midgley, 2008, p. 472). They also
indicate that although participants improve their incomes, it is not clear whether this
benefit accrue to the society and positively affect other people in the community and
national levels (Midgley, 2008, p. 473). Clients and borrowers may indeed acquire
benefits from microfinance, but its impact on alleviating poverty at the global level is still
debatable. Other critics believe that market-based solutions are still more effective in
uplifting the economic status of the poor. Aneel Karnani (2008, p. 23) for instance,
believes that employment and increased productivity are ultimately the most practical
solutions in poverty alleviation. He also emphasizes the role of government in providing
programs and services that could significantly impact the lives of the poor.
Another equally important issue on the role of microfinance as a poverty alleviation tool
involves sustainability. Because MFIs usually rely on donations from different
organizations, foundations and governmental agencies, their operations and financial
services are clearly dependent on the frequency and amount of monetary support that
they receive from donors. Since donations can be unreliable, a trend towards self-
sustainability has become more evident among MFIs because this allows them to better
serve their clients and keep up with the high costs associated with their operations
(Husain, 2008, p. 40). The Grameen Bank best illustrates this idea of a sustainable
microfinance institution, charging only a modest interest rate of about 20 percent to its
customers (Engler, 2009, p. 84). Muhammad Yunus believes that this rate is just
enough to maintain the sustainability of his bank (Yunus, 2007, p. 22).
The problem lies, however, on those MFIs that charge higher-than-normal interest rates
to the poor. Of course, this raises the question of what is the normal and acceptable
rate that can be charged to borrowers. But either way, when MFIs start charging their
customers high rates in order to cover costs, and perhaps even earn profit, the
customers inevitably suffer and are thus faced with increased difficulty in repaying
higher interests and loans. When MFIs shift direction and aim at becoming profitable, or
more than sustainable, they develop a tendency to hurt the very same group people that
their institutions depend on for operations. The real aim of fulfilling social goals may be
overshadowed by pure economic interests if MFIs would continue to pass on the burden
of costs to their customers by charging high interest rates.
Despite its significant impact on poverty levels in third world countries, microfinance
faces challenges in effectively alleviating poverty in developed countries Although it has
been proven to improve the lives and increase the income of people across Asia and
other developing countries in the world (Hossain and Knight, 2008; Chemin, 2008), it
has faced difficulties in significantly impacting the poor in more advanced countries,
such as the United States. A study conducted by Schreiner and Morduch (as cited in
Carr & Yi Tong, 2002) reveals that there are two important factors which affect the
performance of MFIs in the United States. They are: 1) the structure of U.S. economy,
which is rather more complicated than those of developing countries and have more
barriers to entry for microentrepreneurs, and 2) the small size of microenterprise sector
in the country. Because of these factors, which make establishment and management
of microenterprises difficult, a number of MFIs have closed down because borrowers
could not repay their loans. Therefore MFIs in the United States (and other
industrialized countries as well) must adapt a diversity of approaches to achieve the
best structure of MFIs that can work well in countries, which greatly differ from
developing nations (as cited in Carr & Yi Tong, 2002, p. 55). By analyzing the
differences and difficulties faced by microentrepreneurs in various regions of the world,
MFIs can become more effective in accomplishing their social and sustainability goals
as they develop methods and services that can further help their clients.
4. The Methodology and Research Design
The design employed in this study is the descriptive survey method. The method is
ideal, as the study involved collecting data from rural communities members of
microfinance institutions (MFIs ) with a view to analyze the correlation between
microfinance and poverty reduction. Population comprised four hundreds –fifty rural
community members of MFI’s which are Grameen Bank, BRAC and ASA. The stratified
random sampling technique is used while the convenience sampling is adopted to draw
elements or respondents to be included in the study. A total of two hundred and eighty
six (286) questionnaires were collected and used for the analysis. The study used
descriptive statistics, chi-square and ANOVA statistical tools in testing the research
questions of the study. Chi- Square test is used for Question one because the data
generated is measured in scale while ANOVA test is used for Question three and
four, as the data generated is measured in nominal scale. The Statistical Package for
Social Science (SPSS Version 15.0) was utilized for data analysis.
5. Finding of the results
This section discusses the descriptive statistics, chi-square and analysis of variance
results on the impact of microfinance on poverty reduction in Bangladesh. The results
obtained from the analysis were used to test the hypothesis of the study which is stated
in the null forms as:
What is the significant difference between microfinance and poverty reduction?
Table 1: Chi Square test
Assmp. Sig (2-sided)
Linear by Linear
Asso. N of Valid
a. 222 cells (99.1%) have expected count less than 5. The minimum expected count is 0.01
The table above shows that the Pearson Chi-Square (291.995) is greater than p-value
of (.000), the Likelihood ratio of (277.199) is greater than p-value of (.000), linear by
Linear association of (3.855) is greater than the p-value of (.050), hence the null is
rejected that there is no significant correlation between microfinance and poverty
reduction and the alternative question is accepted that there is a significant
correlation between microfinance and poverty reduction in Bangladesh. This result is
consistent with the studies conducted by Imboden (2005) that microfinance plays an
important role in the alleviation of poverty.
Table 2 Descriptive statistics
Source: SPSS output version 15.0 for data collected from field survey, 2012.
Table 2 above shows the mean, standard deviation, variance, skewness and kurtosis
for microfinance and poverty reduction of (19.80, 3.463, 11.994, -.512 and -
.835) and (18.4321, 13.75820, 189.288, 15.508, 254.969). The descriptive statistics is
consistent with the chi-square result in table 1 above.
What is the significant difference between microfinance and traditional savings rotating
Table 3: ANOVA
Source: SPSS output version 15.0 for data collected from field survey, 2012.
The table above shows the analysis of variance for question two. The corrected model
gave an f value of 2.478 which is greater than the p-value of 0.003 and
the traditional savings rotation system f value of 2.478 which is still greater than the
p-value of 0.003, hence we reject the null that there is no significant difference between
microfinance and traditional savings rotating system and accept the alternative Question
that there is significant difference between microfinance and traditional savings rotating
system in Bangladesh.
Table 4: Descriptive statistics
Table four above shows the descriptive statistics of the difference between microfinance
and traditional savings rotating system. Microfinance mean, standard deviation,
variance and skewness, and kurtosis values are(19.83, 3.468, 12.03, -.509, and
-.844) and the traditional savings rotating system values were (17.72, 3.270, 10.695, -
.011, -.877).These values showed difference between microfinance and the traditional
What is the significant difference between loan repayment and poverty alleviation?
Table 5: ANOVA
a. R Squared = .125 (Adjusted R Squared = .080)
Table five above shows the analysis of variance between loan repayment and poverty
reduction in Bangladesh. The corrected model f-value of 2.769 is greater than the p-
value of 0.001 and the poverty reduction f value of 2.769 is also greater than the p-
value of 0.001. Hence, we reject the null and conclude that there is significant difference
between loan repayment and poverty reduction Bangladesh.
Table 6: Descriptive statistics
The descriptive statistics table 6 above shows the mean, standard deviation, variance,
skewness and kurtosis for loan repayment (LRP) of (19.86, 3.424, 11.725, -.485,
and -.801) and poverty reduction (PR) of (17.92, 3.136, 9.833, -.056 and -.823).
This descriptive statistics values also showed differences that is consistent with the
analysis of variance result.
What is the significant difference between microfinance and status of women?
Table 7: ANOVA
a. R Squared = .120 (Adjusted R Squared =.078)
Table 7 above shows the analysis of variance result for the difference between
microfinance and the status of women in a village, Bangladesh. The corrected
model f-value of 2.864 is greater than the p-value of 0.001 and the status
of women f-value of 2.864, which is also greater than the p-value of
0.001. Hence, we reject the null and accept the alternative that there is a significant
difference between microfinance and status of women in Bangladesh.
Table 8: Descriptive statistics
The table above shows the descriptive statistics of microfinance and status of women in
Bangladesh. The mean, standard deviation, variance, skewness and kurtosis values of
(19.96, 3.761, 14.142, .063, and 1.742) and (17.90, 3.202, 10.250, -.011 and -.926) for
microfinance and status of women. The statistics is consistent with the analysis of
variance result above.
6. Conclusion and Policy Implications
Microfinance has been a very significant tool of reducing poverty in the developing
countries like Bangladesh. Poverty is an extreme threat to the vulnerable people, as
they cannot fulfill their basic needs of life. This research has been carried out to
evaluate the correlation between microfinance and poverty reduction, the difference
between microfinance and status of women in the society, microfinance and traditional
savings rotating system and loan repayment and poverty reduction. On the basis of
theoretical and empirical discussion of relevant literatures, microfinance alone cannot
alleviate the poverty from the grass root level of society. There are some suggestions
needed which have been implied by many researchers, policy makers and social
workers. As a consequence, Government should require providing the basic
infrastructural facilities such as adequate roads and transports, school, hospitals,
continuous power supply etc. all over the country to get the benefits of microfinance.
Secondly, the intensity of corruption in Bangladesh should be diminished to prevent the
misplacement of microfinance funds to the hands of politician in the society. Thirdly,
Microfinance regulatory authority should be reformed to fulfill the needs of the
unprivileged and vulnerable MFI’s members, mostly women, who are seriously, need for
microfinance. Study also revealed that stories of success are also not enough to
accurately measure the extent to which microfinance has impacted the poor. MFIs are
also criticized for charging high interest rates in the pursuit of becoming self-sustainable
organizations because this decision ultimately affects their impoverished clients and
borrowers. So the MFI’s should be kept in an acceptable interest rate to enable
borrowers pay principal and interest as at when due. Moreover, Microfinance
Regulatory Athority should place proper supervision and regulation of most of the
microfinance institutions in the country to prevent the collapse of such
institutions as witnessed in the microfinance sector in Bangladesh.
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