Using long panel survey data collected three times between the years 1991/92 and 2010/11, this paper examines the role of microfinance in poverty reduction in rural Bangladesh. More specifically, in assessing the impact of microfinance on poverty, this paper makes a distinction between the effects of current participation in microfinance programs and those of past participation, and between the effects of continuous participation in microfinance programs and those of irregular participation. Findings suggest that there is a greater decrease in poverty levels for participants in microfinance programs than for non-participants, and for female participants more than for male participants. Additionally, continuous borrowers fare better than irregular borrowers. Overall, microfinance participation, which is found to be cost-effective for borrowers, has contributed to about one-seventh of the total reduction in moderate poverty and one-eleventh of the total reduction in extreme poverty in rural Bangladesh. Finally, this paper recommends the expansion of microfinance funded growth-oriented activities in the non-farm sector, in particular manufacturing and processing activities, so as to reap larger benefits from microfinance.
Keywords: microfinance, poverty, Bangladesh, rural finance, microfinance dynamics