Programme: MSc.

in Financial Forecasting and Investment

Dissertation research proposal on Economic Analysis of Microfinance and Macroeconomic Stability as Instruments of Sustainable Development of Bangladesh

Submitted by Student number: 1004993

16 February, 2011

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1. Working Title The title of the dissertation research proposal is Economic analysis of microfinance and macroeconomic stability as instruments of sustainable development of Bangladesh.

2. Introduction 2.1. Introductory Notes Microfinance is an exciting topic in current development debate and has known a tremendous growth in the last decade. Though the positive effects of microfinance has been identified and recognised worldwide, this financial tool cannot be only solution for poverty alleviation nor can solely achieve sustainable growth in economy. In addition to that macroeconomic stability is one of the major concerns for any economic development as well as for sustainable growth. This issue can affect the microfinance in policy making and in structuring microfinance model. A further concern for economic and social development for Bangladesh leads to concentrate on sustainable development of the country. As microfinance and macroeconomic stability is major financial development tools for any economical growth, the microfinance and macroeconomic stability are to be focused as an instrument of sustainable development. 2.2. Background and Motivation While reading the book creating a world without poverty by Nobel laureate Muhammad Yunus and find him dedicating the book to to everyone who wants to create a world where not a single person is poor; I got inspired to see my country Bangladesh with no poverty and with equality. As a financial development tool for poverty alleviation, microfinance is not a new concept; still the efficiency of the microcredit is not seen enormously in the economy. While talking about creating a better Bangladesh with macroeconomic stability and poverty alleviation, why not coming up with sustainable development of Bangladesh? Three major indicators that are economic, social and environmental changes are influencing sustainable development of any country and for a country like Bangladesh economic condition can only be changed while people start living above the poverty line. One of the major issues in microcredit is the rate of interest. In Bangladesh the payment interest rate for microcredit is quite higher. When a country has stable economic condition,
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the volatility of interest rate is relatively lower. Thus it is quite important to know the concept of macroeconomic stability and to know the relationship between macroeconomic stability and microfinance. As both microfinance and macroeconomic stability are two important indicators to have sustainable development, both the issues should be focused. When developing countries do not have macroeconomic stability and well structured frameworks for microfinance to work efficiently, it is not possible to abate poverty or inequality and to achieve sustainable development. Hence, the necessity of reforming structures and policy arises. 3. Research Objectives This paper will focus on four sets of interesting sub-questions and hypothesises regarding the mentioned topic. Set of sub-questions 1: the first set of questions focuses on microfinance which is one of the crucial financial development tools for poverty alleviation in Bangladesh.
Is microfinance creating financial capital or human capital or social capital? How microfinance can reach Bottom of the Pyramid (BOP) market? Whether commercial restructuring in microfinance is essential to create sustainable

growth?
How to create innovative model to work microfinance efficiently?

Set of sub-questions 2: the second set of questions focuses on macroeconomic stability

Do the indicators of macroeconomic stability are affecting the indicators of microfinance? Does the macroeconomic stability affect the repayment rate of microcredit? How the macroeconomic stability can help to achieve sustainable development?

Set of sub-questions 3: the third set is related to analysis of hypothesis of microfinance and macroeconomic related issues
Hypothesis 1: Microfinance is more developed in stable economies. Hypothesis 2: Microfinance is more present in economies with lower interest rates. Hypothesis 3: Microfinance is more developed in densely populated areas.

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Set of sub-questions 4: the fourth set of questions focuses on sustainable development issues
How microfinance and macroeconomic stability can be used in policy analysis of

sustainable development?
How restructure of microfinance modelling and creating macroeconomic stability can

reach sustainable development?

What other indicators should be added as major indicators for sustainable development of

Bangladesh?

4. Research Methodology The paper will consist of different sections with theoretical and analytical views. The opening section gives an overview of the history and a detailed theoretical description of the microfinance and macroeconomic stability with an emphasis on sustainable development. This section is based on secondary literature research as well as on primary research gained from the seminars and from discussions with experts. The second section of the paper reviews the relevant literature on current situation of microfinance and macroeconomic stability to evaluate the efficiency of the indicators. In order to evaluate the current situation of the mentioned indicators of sustainable development many articles and research project results will be analyzed. The third section demonstrates how microfinance affects macroeconomic stability and vice versa. Thus to elaborate the relationship between microfinance and macroeconomic stability, this section looks at a range of models and data analysis about the interrelation between microfinance and macroeconomic stability. Even though this paper focuses on literature review mostly, this also includes explanations and comparison of different models to create more efficient model to have sustainable development. For testing the hypothesis different time frame and areas will be taken into account. However, this section is subordinate and subject to the timeframe and restriction of resources. The forth section of the paper discusses how to develop the model increase the efficiency of microfinance and to create stable economic situation as indicators of sustainable development. This will also include whether microfinance and macroeconomic stability are the two major indicators for sustainable development. This literature review will be based on analyzing

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reports from Asian Development Bank (ADB), World Bank, United Nations Development Programme (UNDP) and from other academic research papers, articles, journals and books. For creating efficient restructure of the model for microfinance, two models will be focused that are poverty focused and profit maximising microcredit programs. In addition to these theoretical models, a description and interpretation of empirical results will be presented. Thereby, classic historical results as well as state-of-the-art research projects will be cited. In a possible fifth section there would be place for the discussion of more business focused questions concerning the combination of macroeconomic stability and innovative microcredit products. This should be done in an explorative analysis of sustainable development by recommendation of reforming the model. 5. The Data and the Empirical Model Different microfinance institutions (MFI) are working in several regions of Bangladesh for microcredit lending. Thus the data will be collected from major MFIs databases which are published nationally or internationally. The empirical model that may be used to test the hypotheses is of the form: Percentage of the population served by MFI in Bangladesh= f (macroeconomic variables, infrastructure variables and geographical variables) + conventional residual The macro-economic variable contains the level of inflation and the GNI per capita. The infrastructure and geographical framework encloses population density in different regions of Bangladesh and industry value added to assess the level of industrialization. Most of the data comes from the Word Development Indicators. Panel data will be used to evaluate this section. The UNDP-Human Development Index is to be used to assess the level of human capital. The World Bank database on governance indicators will be used to estimate the level of governance. Statistical Bureau of Bangladeshs database will be used to know macroeconomic variables, infrastructure variable in different period of time scale and from different areas. It should be noted that the hypothesis form may be changed if other variables are needed to add to have a good model for the research purpose.

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6. Outline of the Dissertation: The structure of the dissertation is mostly like to be as follows. However, more sections and subsections will be added as needed accordingly.
Chapter One: Introduction

Introductory Notes Background and Motivation Research Questions Scope of Studies Method of Study Study Output Limitations of Study

Chapter Two: Microfinance

Definition of Microfinance History of Microfinance Background on Poverty, Inequality and Sustainability Microfinance Myths and Realities Microfinance and Economies of Scale Analysis of sub sector research questions 1 Mathematical view of reaching the poor and sustainability The Need for Alternative and Innovative Tools for Poverty Alleviation Microfinance and Key Development Triggers Microfinance and Commercial Banking Sectors

Chapter Three: Macroeconomic Stability

Definition of Macroeconomic Stability Indicators of Macroeconomic Stability Basic Problems: Macroeconomic and Financial Asymmetric Reducing Macroeconomic Volatility Domestic Policy Response: Broader View of Macroeconomic Stability Analysis of subsector research questions 2

Chapter Four: Relationship between Microfinance and Macroeconomic Stability

Hypothesis Testing Discussion of Results

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Policy Implications

Chapter Five: Sustainable Development

Definition of Sustainable Development Indicators of Sustainable Development Measuring Sustainable Development Capital Approach to Sustainable Development: Theory Analysis of subsector research questions 4 Sustainable Microfinance

Chapter Six: Conclusions

7. Preliminary Bibliography Ahmed S (2003) Microcredit and poverty: new realities and strategic issues in Attacking poverty with microcredit, University Press Limited, Dhaka Amin S and A Pebley (1994) Gender Inequality within Households: The Impact of a Womens Development Programme in 36 Bangladeshi Villages, in The Bangladesh Development Studies Special Issue on Women, Development and Change Vol. XXII, No. 2&3, pp. 121-155 edited by S. Amin, BIDS, Dhaka Atkinson, G., R. Dubourg, K. Hamilton, M. Munasinghe, D. Pearce and C. Young (1997) Measuring Sustainable Development: Macroeconomics and the Environment, Edward Elgar Publishing, Cheltenham Anthony M H C and Nicholas J R (1996) Sustainability: A System Approach. Earthscan Publications Limited, London Cain M, S R Khanum and S Nahar (1979) Class, Patriarchy and Womens Work in Bangladesh. Population and Development Review, Vol. 5 (3), pp. 405-438 Charitonenko, S. and S.M. Rahman (2002), Commercialization of Microfinance: Bangladesh, Manila: Asian Development Bank. September Chowdhury M and R Cash (1996) A simple solution: teaching millions to treat diarrhoea at home. University Press Limited, Dhaka Credit and Development Forum (2002) CDF Microfinance Statistics, Dhaka
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Eurostat (1997) Indicators of Sustainable Developmetn: A pilot study following the methodology of the United Nations Commission on Sustainable Development. Statistical Office of the European Communities Luxembourg. ISBN 92-827-9827-5 Eurostat (2007b) Improvement of the quality of the Structural and Sustainable Development Indicators - Analysis of national sets of indicators - Comparison of national Sustainability Indicators for 21 countrie University of Natural Resources and Applied Life Sciences and University of Economics and Business, Vienna Farashuddin F and N Amin (1998) Poverty Alleviation and Empowerment: An Impact Assessment Study of BRACs RDP Ten Qualitative Case Studies mimeo, BRAC Research and Evaluation Division Gauri V and J Galef (2004) NGOs in Bangladesh: Activities, Resources and Governance (draft mimeo, The World Bank, Washington D.C.) Hossain N (2003) Elites and poverty in Bangladesh D.Phil thesis, University of Sussex Jain P and M Moore (2003) What makes microcredit programmes effective? Fashionable fallacies and workable realities IDS Working Paper 177, University of Sussex Khandker S (1998) Fighting Poverty with Microcredit Oxford University Press Khandker S (2003) Microfinance and Poverty: Evidence Using Panel Data from Bangladesh, World Bank Policy Research Working Paper 2945 Lipton, M (1996) Successes in anti-poverty Issues in Development Discussion Paper no. 8, International Labour Office, Geneva Manfred Z and Richard L. M (2002) the Triangle of Microfinance: Financial Sustainability, Outreach and Impact the Johns Hopkins University Press, Baltimore and London Mathias D, Xavier F and Richard P (2009) Macroeconomic Stability and Financial Regulation: Key Issues for the G20 Centre for Economic Policy Research, UK Matin I (1998) Mis-Targeting by the Grameen Bank: A Possible Explanation IDS Bulletin Volume 29, No. 4, 1998

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Montgomery R, D Bhattacharya and D Hulme (1996) Credit for The Poor In Bangladesh: The BRAC Rural Development Programme and the Government Thana Resource Development and Employment Programme in Hulme D and P Mosely Finance against Poverty, Vols. 1 and 2, Routledge, London Morduch J (1998) Does Microfinance Really Help the Poor: New Evidence from Flagship Programs in Bangladesh, Department of Economics and HIID, Harvard University and Hoover Institution, Stanford University Mustafa S, I Ara, D Banu, A Kabir, M Mohsin, A Yusuf and S Jahan (1996) Beacon of Hope: An Impact Assessment Study of BRACs RDP Research and Evaluation Division, BRAC, Dhaka Susan H (1995), Managing to Empower University Press Limited, Dhaka and Zed Books, London & New Jersey Wood G and I Sharif (1997 eds.) Who needs credit? Poverty and finance in Bangladesh Zed Books, London Yunus M (1998) Banker to the Poor University Press Limited, Dhaka Yunus M (2007) Creating a world without poverty Public Affairs, New York Zaman H (1999) Assessing the poverty and vulnerability impact of microcredit in Bangladesh: a case study of BRAC Policy Research Working Paper Series 2145, The World Bank

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