Non-linearities in returns to participation in Grameen Bank programs

Abstract

This paper studies the benefits of participation in micro-finance programs, where benefits are measured in terms of the ability to smooth the effect of seasonal shocks that cause consumption fluctuations. It is shown that although membership in these programs is an effective instrument in combating inter-seasonal consumption differences, there is a threshold level of length of participation beyond which benefits begin to diminish. Returns from membership are modelled using an Euler equation approach. Fixed effects non-linear least squares estimation of parameters using data from 24 villages of the Grameen Bank suggests that returns to participation, as measured by the ability to smooth seasonal shocks, begin to decline after approximately two years of membership. This implies that membership alone no longer has a mitigating marginal effect on seasonal shocks to per capita consumption after four years of participation. Such patterns suggest that the ability to smooth consumption as a function of length of membership, need not accrue indefinitely in a linear fashion.

JEL classification:

• 012
• 016
• D12

Acknowledgements

I am indebted to Mark Pitt, Andrew Foster, Moshe Buchinsky, Shahid Khandker, Faruq Iqbal, Jonathan Morduch, Rachel McCulloch, Gary Jefferson, and Narayanan Subramanian. Thanks a1so to seminar participants at Brown, Georgetown, The World Bank, and Brandeis University. I am grateful to two anonymous referees whose comments have greatly improved the paper. Support from the Hewlett foundation is acknowledged. I am responsible for all errors that remain.

Notes

1. As noted before, given a poor household's inability to cope with either kind of shock, the model does not differentiate between the effects of exogenous unforeseen shocks and anticipated shocks from seasonality.

2. Note that for those households that face a below average cost of borrowing, (r _ijt –r _jt ) may be negative. This is not problematic here since there are practically no such households in these data.

3. Length of membership is not endogenous due to drop out rates. In these data, only two households are reported to have dropped out of the program between the first and third rounds.

4. We estimate fixed effect parameters for all 24 Grameen villages by excluding the constant term from the model.

5. The positive sign on the price variable indicates that the demand for rice and wheat are relatively inelastic. This is not unexpected since rice and wheat are staple food grains in Bangladesh.

6. The model thus becomes:

7. As noted above, when we estimate each set of inter-seasonal consumption changes separately, length of participation in Season 3 does not have significant effects in reducing consumption fluctuations between Seasons 3 and 2.

8. In the absence of land ownership, only those households whose assets are less than or equal to the value of one acre of medium quality land in that area are eligible to participate.