CRITICAL EVALUATION OF MICROFINANCE AS A POVERTY REDUCTION TOOL IN NEPAL: A FOCUS ON HOUSEHOLD CONSUMPTION

Abstract

This research critically evaluates the impact of microcredit as a poverty reduction tool in Nepal, with a specific focus on its influence on household consumption and assets. Employing multivariate techniques, the study utilizes data from the Nepal Living Standards Survey 2011, encompassing 5,988 households. Recognizing the endogeneity inherent in household microcredit participation, the research employs the instrumental variable technique (IV method). After addressing endogeneity concerns, instruments such as the distance of the bank, distance of the cooperative from the household, and the size of the household's landholding are utilized. The eligible households in the intervention group were reduced to 475 out of the total 779, while in the control group, 2,953 households were selected from the initial 5,209. The Conditional Mixed Process (CMP) estimator is employed to provide flexibility in combining continuous and binary variables in the same model. The multivariate analysis reveals a positive and significant relationship between microcredit participation and household consumption, as well as assets in the intervention group compared to the control group. Household consumption is disaggregated into food consumption, non-food consumption, and total consumption. Similarly, household assets include ownership of livestock (buffaloes, cows, sheep, etc.), transportation (cycle or motorcycle), and appliances (refrigerator, television, CD player). The results and findings, coupled with a review of relevant literature, present a comprehensive body of evidence supporting the notion that microcredit programs have the potential to increase incomes and elevate families out of poverty. This paper concludes that microcredit emerges as a viable and potentially sustainable tool for poverty reduction in Nepal.