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LESSONS:

Bangladesh: Rural Livelihood Project

sector: Finance | country: Bangladesh

The Independent Evaluation Department (IED) agrees with the lessons pointed out in the project completion report (PCR) and finds them valuable especially in the future design of microfinance projects.

It is important to emphasize further that, to succeed and be sustainable, microfinance programs must be professionally managed like any other business. Loans must be repaid and the microfinance institutions (MFIs) must operate efficiently to continue providing the much-needed financial services to poor households. The selection of an appropriate executing agency is a critical factor in the success of a microfinance program. Nonfinancial government agencies like the Bangladesh Rural Development Board (BRDB), despite their strengths in rural development, lack the capability for sustainable microfinance programs that require specialized skills and good governance. An apex lending institution with proven experience in microfinance would have been the more appropriate choice.

Another lesson that can be drawn relates to the targeting of project participants. The project was designed to target the poorest, particularly widows, divorced and destitute women, and others with no regular source of income. However, some 33% of the beneficiaries were reported to be above the poverty line. While this is an indication that the selection criteria were not strictly applied, it also illustrates the limits of microfinance in reaching the poorest of the poor.

Experience with other ADB microfinance projects has shown that the poorest of the poor, despite being targeted in the design, generally do not constitute a significant proportion of the project beneficiaries. Moreover, microcredit often does not reach the poorest (those at the bottom of the income distribution). In practice, MFIs, driven by cost-efficiency and financial sustainability concerns, tend to target those with greater repayment capacity. The poorest also need a range of other services besides microfinance, such as training, health provision, livelihood, and social development. The destitute have very limited capacity for debt and often no income to repay loans. Thus, microfinance alone may not be the appropriate solution for them. Further, microfinance needs transparency and reporting of performance to work at its best. Irregular and unstandardized reporting on operations and financial management among the upazila bittaheen central cooperative associations (UBCCAs) made it difficult to monitor and respond on time to delinquency, repayment, and sustainability problems. MFIs must report accurately on financial and social indicators to perform better.

Experience from the implementation of the project highlights the need for effective support for sustainable MFIs. Constraints on outreach and financial sustainability must be addressed, and performance standards installed to ensure monitoring and supervision. To achieve sustainability and widen outreach, the capacity of MFIs must be strengthened. A microfinance project as such this one should, moreover, follow internationally accepted guidelines and principles for the design of microfinance projects.

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