Cost effectiveness or serving the poor? Factors determining program placement of NGOs in Bangladesh

The trade-off between poverty alleviation and cost effectiveness (profit maximization) encountered by NGOs is a global concern for the microfinance industry. To understand this trade-off at the micro level, we investigate the factors determining the program location choice of NGOs using village level survey data from Bangladesh. We document that NGO coverage in a village-measured by the percentage of NGO member households, number of NGOs working, and NGO density in the village-decreases with distance of the village from marketplaces and increases with the adoption of modern irrigation methods. The results suggest that cost effectiveness and loan repayment concerns serve as barriers to reaching the poor. They also suggest the inability of the microfinance program to mitigate credit market imperfections in the presence of output market imperfections, and this implication can be generalized for the microfinance industry worldwide. The results also shed light on the specific nature of the selection bias previously unknown and can be important for impact evaluation of the microfinance program.