Rural finance programs and food insecurity in subsistence economies: Do market-based solutions work?

Given the vulnerability of some developing countries to food shortages, this study explores the role of financial inclusion on food insecurity and economic development as measured by consumption expenditures. Using household data from over 1,700 households in rural Bangladesh, this study decomposes consumption expenditure to explore whether rural credit programs threaten food security and discourage self-sufficiency in food production. This study uses the 1991/92 and 1998/99 surveys compiled by the Bangladesh Institute of Development Studies (BIDS) and the World Bank. The study also examines whether access to small-scale credit improves socio-economic conditions for the household. To estimate the empirical association between access to credit, food security and self-sufficiency, a panel data model is used with three dependent variables. The dependent variables are household consumption expenditure on food purchased in the market, household consumption expenditure on food produced by the household and the Household Dietary Diversity Score (HDDS). The findings suggest that microfinance plays a positive role in increasing a household’s ability to purchase food in the market. However, access to credit is negatively associated with consumption of food produced by the household. The results suggest that access to credit creates a food production substitution effect. In terms of the empirical correlation between the HDDS and access to credit, the results are mixed. Some credit programs help improve the household’s nutritional food intake and others do not. This study fills the gap in the literature on rural finance because the empirical focus is on non-economic outcomes. The relevance of current food shortages in developing economies renders the findings in the study important and instrumental for rural finance program design, economic development and social sustainability. The results also stimulate critical discussion about the effectiveness of market-based solutions to poverty reduction in developing countries.