MORAL AND ETHICS IN
ISLAMIC MICROFINANCE AND
ITS IMPACT ON RURAL POOR’S
LIVELIHOOD
D R . M I Z AN U R R AH M AN
J AI Z B AN K P L C
NIGERIA
EMPIRICAL
STUDY IN
BANGLADESH
OUTLINE OF PRESENTATION
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Introduction
Objectives
Brief Literature Review on Microfinance in Bangladesh
Theoretical Concept on Ethics and Morality
Estimation of Ethics and Morality
Conceptual Framework
Sources of Data
Analytical Techniques
Impact of Microfinance on Clients Religious Practices
Impact of Microfinance on Family Income
Impact of Microfinance on Clients Wellbeing
Impact of Moral and Ethics on Clients Livelihood
Clients opinion on Challenges of Microfinance and its Way -out
Conclusion and Recommendations
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INTRODUCTION OF THE STUDY
 Origin of Microcredit
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Grameen Bank founded in Bangladesh in 1983
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Limitation of Microcredit and foundation of Islamic Microfinance
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Islamic Microfinance (RDS) of IBBL founded in 1995
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Impact of Islamic Microfinance of Bangladesh in 2007
 Present Situation of Islamic Microfinance in the World
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Conventional microcredit clients, only in Bangladesh is about 25 million
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While, total Islamic Microfinance clients in the world is about 1 million. More
than Half of them is in Bangladesh and over 80 percent of them is concentrated in
Indonesia, Bangladesh and Afghanistan.
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Different countries of Middle east, North Africa especially Sudan, Iran, Turkey,
Ethiopia, Bangladesh, Pakistan, Malaysia and Indonesia have mentionable growth
in Islamic Microfinance
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ISLAMIC MICROFINANCE: SPECIAL
FEATURES
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Shariah based Islamic micro-finance
Almost 94 per cent clients are women
Collateral free investment
Five members group is consists
Group members are the security of each others
Finance farming and off-farming activities
Generate Self-employment and income
Provides Welfare, moral and ethical services
Qard facilitates for tube-wells, sanitary latrines
Lowest profit rates
Highest recovery rate (99.95%)
Number of drop out is also mentionable.
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TARGET GROUPS OF MICROFINANCE
Farmers
Sharecroppers
Persons engaged in off-farm activities
Fishermen
Poultry rearing
Livestock farming
Women and distressed people
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BRIEF STATISTICS OF ISLAMIC
MICROFINANCE IN BANGLADESH
 Islamic Microfinance Scheme (RDS) of IBBL started functioning
in 1995.
 Presently, the scheme is operating in more than 13,000 villages
in 60 districts.
 Some 0.67 million group members of around 22,206 centres of
the country covering 94% are females.
 As on 31st December 2012 the total disbursement is USD 618
million and the recovery rate is 99.58%
 The scheme also provides welfare, moral and ethical services to
the rural people of the country.
 The total assets of Islamic microfinance in Bangladesh is half of
the same in the world.
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LITERATURE REVIEW (CONVENTIONAL)
 Rah man (2005 ) in Banglad esh found th at v arious lo an s p rogr a m alone were not
enou gh to alleviate pov erty, un less th ey were suff icien t env iron men t with
mater ial and social capital
 PKSF (200 5 ) in Bang lad esh f ound th at ab so lu te pov erty was redu ced b y 9%
during 1991 to 2000; moderate poverty declined by 5% during 2000 to 2004.
 Chowdhury and Bhuiya (2004 ) in Bang lad esh fo und po sitive i mpacts on human
well-b eing , survival rate and schooling of children .
 A min , Rai and Rop a (200 3 ) in Gra meen Bank, BRAC, ASA and foun d micro cred it p rog ra mme was mo re successfu l to re ach the poo r, b ut less su ccessf ul to
reach the vulnerab le poor.
 Za man (2001 ) assessed th e imp act of micr ocred it o n poverty alleviation and
wo men e mp o wer men t and fo und po sitiv e imp act on in co me, d ecisio n mak ing
ability and in reducing gender disparity.
 BIDS (2001 ) in B ang lad esh f ound positiv e i mp act on th e in co me o f
micro cred it particip an ts in comp arison to non-program particip an ts .
 Khandker (2000) in Bang lad esh found vo lun tary sav ing was increased, which
was more pronounced in the cases of women than men .
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LITERATURE REVIEW (ISLAMIC)
 Fadlallah (2012) mention ed that mo st resear ch ers in Tu rkey, India, Bangladesh
and Eth iop ia and o th ers f oun d th at Isla mic mi crof in an ce h as a g reat i mp a ct on
the poor ’s econo mic independence .
 In Pak istan , 86 .8 p er cen t of su rv eyed p eop le said th at mic ro loans were q uite
usefu l in ach iev ing p ro sp erity and in creasing th e pu r ch asing po wer of
beneficiaries .
 In th e Midd le -east and No rth Af rica found th at th is typ e of f in an ce was th e
most able to achieve social and econo mic develop men t goals.
 In th e Arab world, th ere are so me successf ul exp erien ces su ch as: Jab al AlHoss Fund s Project in Syria, Al-Hasid a Project in Ye me n, and Al-Qard AlHassan Association in Lebanon. (Fadlallah , 2012)
 Iran ian exp erience is con sid ered p ion eer in t he f ield of Isla mi c Micro -f in ance
th at is d evo ted to fund basic need s. Iran has n early 3000 Qard Hasan fund s in
th e u rb an and ru ral areas . Isla mic micro loans are also po pular in non -Isla mic
countries .
 Rah man (2008 , 2009 ) in Banglad esh foun d th at Isla mic microf inance hav e
positiv e i mp act on ru ral pov erty allev iation esp ecially on ho useho ld s’ in co me ,
crop productiv ity, and level of expenditure .
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CONCEPTUAL FRAMEWORK OF
MICROFINANCE
Poverty
Microfinance
Factors Influencing IGAs
1.
Age
2.
Education
3.
Asset holdings
4.
Land size
5.
Family labour
6.
Rural infrastructure
7.
Skill-building training
8.
Efforts and endeavour
9.
Morality and ethics
IGAs
Household
Income
Livelihood
Improvement
Empowerment
Sustainable
Livelihood
Poverty Alleviation
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Income
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Health
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Sanitation
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Drinking water
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Education
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Skills
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Knowledge
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Capacity
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HHs assets
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HHs welfare
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Efficiency
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Productivity
Sources of Income
Generating Activities
On-farm Activities
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Crop
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Fisheries
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Livestock
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Poultry
Off-farm Activities
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Small business
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Mat making
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Bamboo works
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Sewing
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Van ridding
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Labour selling
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OBJECTIVES OF THE STUDY
 Literature review shows that conventional microcredit does not care about
ethics and morality rather cares about poverty alleviation.
 While, Islamic microfinance care about ethical and moral development of
the clients
 But none studied the ethical development of the clients and its impact on
poverty alleviation.
 Rahman (2008) focused on ethical and moral development and its impact in
Bangladesh which have also been narrow in their focus.
1. So, the main objective of this study was to examine the linkage between
clients moral and ethical behavioural changes as well as their income and
demographic and investment factors, using modern econometric techniques.
 Besides, the size of households, low level of literacy, lack of credits &
training, weak infrastructure and poor transportation, weak resource base,
faster growing population is aggravating the poverty level of the country.
2. Other objectives are to determine if the above factors which are most
relevant in explaining poverty alleviation will have important implications
for refining micro-finance policy.
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THEORETICAL CONCEPT OF MORAL AND
ETHICS
 Syed Naqvi listed five elements of Islam’s moral and ethical system
which significantly influence their economic behaviour which are: (i)
Islam is a complete way of life; (ii) Allah is omnipresent; (iii) Allah
owns all wealth; (iv) Individuals must be committed; and (v) the poor
have a right to the wealth of the rich.
 Islam: Ibn al-Qayyim emphasizes that it is preordained that grains will
be obtained only after performing a certain chain of activities.
Likewise, quenching the thirst or satisfying the appetite depends on
drinking water or taking food. The same is true of all affairs in this life
and affairs pertaining to the life hereafter.
 Christianity : Being in debt is equivalent to servitude because of the
immense burden to repay. Hence, “The rich rule over the poor and the
borrower is slave of the lender” (Proverbs 22:7).
 Judaism: "The first question an individual is asked in the afterlife at
the final judgment is: “Did you conduct your business affairs
honestly?” (Babylonian Talmud, Shabbos 31a).
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ESTIMATION OF ETHICS AND MORALITY
OF CLIENTS
 Opinions were sought from the clients about their awareness and
practice of 10 different religious activities.
 A four-point Likert scale was used to evaluate the borrowers, moral and
ethical development, which were regular, very often, very rare and not
at all.
 The points of 10 statements were summed up and the total score of each
borrower were divided by the highest score of 75 in order to create an
index of acceptability. On or above 70% performance of the client was
considered satisfactory. So, clients who scored more than 70% were
coded one; and zero otherwise.
 Mahmud (1999) created an acceptability index towards effectiveness of
ADIP programme based on the 70% or above score which was coded as
one to indicate that they were well-off under the ADIP’s microcredit
programme, otherwise coded zero.
 Begum (1998) created an awareness index based on 50% score in order
to indicate that awareness level increased towards their living-standard;
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otherwise coded zero.
PRACTICAL ESTIMATION OF ETHICS AND
MORAL
Statements
Regular
Very often Very rare
Not at all
Score (no.)
10 (0)
6 (4)
4 (6)
0 (10)
Saying prayer
57
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29
26
Know how to recite Holy Quran
113
-
-
32
Reciting Holly Quran
31
47
39
28
Fasting
109
21
17
08
Inviting towards Islamic activities
48
29
37
31
Involvement with dowry
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-
-
134
Maintain Parda
57
33
30
25
Involve with interest
31
23
19
72
Misunderstanding with husband
21
19
07
98
Involvement with social activities
03
49
51
42
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SOURCES OF DATA AND ANALYTICAL
TECHNIQUES
 Primary data were collected from the field in Early 2013, through
interviewing 150 clients from some selected areas, namely Amin
Bazar, Savar and Manikgonj.
 Impact of ethics and moral of the microfinance (RDS) clients on
their livelihood was the major interest therefore assessment was
made comparing clients’ present position (31 December 2012) with
their base information (at the time of becoming member).
 Recall method was used to find base information of the clients
 Study areas were purposively selected based on the convenience of
researcher ’s data collection.
 From the clients lists of the study areas a second list was prepared
from clients having minimum 5 years membership; assuming that
without having minimum 5 years involvement with microfinance
activities impact assessment would not be feasible. From the said
lists 150 clients (50 from each area) were randomly selected.
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IMPACT OF MICROFINANCE ON CLIENTS
RELIGIOUS ACTIVITIES
Indicators
Frequency
Change Status
At present
At Joining
Frequency
Percentage
Regular prayer
57
38
19
33.34
Know how to recite Holy Quran
113
49
64
56.64
Reciting Holly Quran
31
19
12
38.71
Fasting
109
56
53
48.62
Inviting towards Islamic activities
48
29
19
39.58
Involvement with dowry
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11
0
0
Maintain Parda
57
31
26
45.61
Not Involve with interest
31
71
-40
-129.03
Misunderstanding with husband
21
43
-22
-104.76
Involvement with social activities
03
0
2
66.66
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INCOME GENERATION OF HOUSEHOLD
BY SOURCES
Source of Income
Off Farm
Small Business
Labour Selling
Service Income
On Farm
Crops
Fruits
Vegetables
Livestock
Poultry
Fish
Others
Total
Household Income
(US$/year)
Present Joining
Change of Income
US$
Per cent
Level of
Significance
t-value
Sig.
496
212
228
388
182
153
108
30
75
27.83
16.48
49.02
4.150
3.210
6.502
0.000**
0.003**
0.000**
231
22
47
51
23
31
210
1551
149
18
39
42
18
23
145
1157
82
4
8
9
5
8
65
394
55.03
22.22
20.51
21.42
27.78
34.78
44.83
31.99
4.890
2.501
2.242
20291
2.284
3.571
5.432
0.000**
0.021*
0.012**
0.022*
0.019*
0.004**
0.000**
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HOUSEHOLDS INCOME MODEL
OLS estimation technique, using log in both sides, for this study which is as
follows:
𝑰𝒏𝒄𝒐𝒎𝒆 = 𝒂𝟎 + 𝟏 𝑻𝑳𝑺 + 𝟐 𝑨𝑮𝑬 + 𝟑 𝑬𝑫𝑼 + 𝟒 𝑭𝑴𝑰𝑮𝑨 + 𝟓 𝑬𝑴𝑪 + 𝑰 + µ𝒊
where,
Y = amount change of annual income of the household,
I = amount of investment taken by the borrowers in 2006,
TLS = total land size,
AGE = age of the borrowers dummy (above 40 years of age is 1 and 0 otherwise),
EDU = education dummy (up to 5 years of schooling is 1 and 0 otherwise),
FMIGA = number of family members engaged in income generating activities,
EMC = ethics and moral of the clients,
𝑖 and  are the coefficients of the variables to be estimated, and
α constant for the equation and µ error term for the equation.
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OLS RESULTS OF HOUSEHOLD INCOME
MODEL
Variables
Coefficient
t-value
Sig.
Constant
3.189
23.314
0.000**
Log of Investment taken in 2012
1.010
2.402
0.020**
Log of total land size
0.121
0.518
0.693
Log number of earning family members
1.210
2.110
0.028**
Borrower’s age dummy (above 40 years
0.322
2.726
0.019**
Education dummy (up to 5 years schooling
is 1; and 0 otherwise)
0.220
0.7183
0.470
Ethics and Moral (Dummy)
0.090
2.847
0.045*
R-squared: 0.612
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ESTIMATION OF WELL-BEING BASED ON
THE CLIENTS’ OPINION
The Logit model was applied to find out the probability level that the clients
would be well-off due to the influence of particular explanatory variable.
𝐿𝑛
𝑃𝑖
= 0 + 1 𝐸𝐷𝑈 + 2 𝐹𝑀𝐼𝐺 + 3 𝐷𝑂𝑀 + 4 𝑆𝐹𝐸 + 5 𝐸𝐻𝐶 + 6 𝐸𝐴𝑀𝐶 + µ
1 − 𝑃𝑖
where,
Pi = probability that borrowers were well-off,
1- Pi = probability that borrowers were not well-off,
EDU = education dummy for the clients (up to 5 years of schooling is 1, 0 otherwise),
FMIG= no of family members involved in income generating activities,
DOM = duration of membership (Years),
SFE = share of food expenditure to the total expenditure (%),
EHC = expenditure on health care (taka),
EAMC= ethics and moral of the clients. and
0 = constant, 𝑖 = coefficient to be estimated and µ= error term.
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LOGIT MODEL FOR CLIENTS’ WELL
BEING
Variable
(B)
Walld
Statistics
1.432
14.44
Sig.
-0.756
0.242
Standard
error
0.723
0.071
Constant
Duration of membership
Education dummy (up to 5 yrs of
Income generating family members
Age of the clients dummy (up to 40
yrs of age is 1 and 0 otherwise)
Share of food expenditure to the
total expenditure (%)
Health expenditure (taka)
Ethics and morals
Cox and Snell R square: 0.198
-2log likelihood: 667.280
Overall accuracy: 82.8
Odd ratio
EXP (B)
0.251
0.343
0.000** 0.713
0.020
0.211
-0.070
0.251
0.067
0.656
0.211
13.59
0.012
0.986
0.00**
0.906
0.987
0.787
0.931
0.011
0.008
4.946
0.018*
1.021
0.018
0.154
0.021
0.213
3.131
3.416
0.051*
0.050*
0.810
0.816
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ESTIMATION OF ETHICAL AND MORAL
CHANGE FACTORS
Logit model is used to find out the probability level that the clients could be better off
due to the influence of particular explanatory variable
𝐋𝐧
𝐏𝐢
= 𝛂𝟎 + 𝟏 𝐄𝐃𝐔 + 𝟐 𝐀𝐆𝐄 + 𝟑 𝐃𝐎𝐌 + µ
𝟏 − 𝐏𝐢
Where,
Pi = probability that borrowers were well-off,
1- Pi = probability that borrowers were not well-off,
EDU = education dummy for the clients (up to 5 years of schooling is 1, 0 otherwise),
DOM = duration of membership (Years),
AGE= age of the borrowers dummy (above 40 years of age is 1 and 0 otherwise). and
0 = constant, 𝑖 = coefficient to be estimated and µ= error term.
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LOGIT MODELS RESULTS OF CLIENTS
ETHICS AND MORAL
Variable
(B)
Standard Walld
Sig.
error
Statistics
Constant
1.21
0.451
Education dummy (up to 5 yrs of
schooling is 1 and 0 otherwise
Odd
ratio
EXP (B)
6.110
0.014** 3.008
0.672 0.161
13.016
0.000** 0.511
Age of the clients dummy (up to 1.411 0.316
40 yrs of age is 1 & 0 otherwise)
14.126
0.000** 0.243
Membership Duration (years)
11.021
0.003** 1.118
0.112 0.032
Cox and Snell R square: 0.198
-2log likelihood: 667.280
Overall accuracy: 82.8
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CLIENTS’ OPINION TOWARDS MICROINVESTMENT PROGRAMMES
 Clients’ opinion about the benefit of micro-investment programs
on their skill, social and economic condition was assessed.
 The clients opined that micro-investment program had brought
positive changes in their skill and socioeconomic status.
 It had also brought positive changes in self-confidence
development, economic solvency, communication skill, and
knowledge on business and religion practices are mentionable.
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MAJOR PROBLEMS CLIENTS’ FACE IN
THE STUDY AREAS
Problems
Per cent
Amount of investment is very small
93.55
Do not have any training programme
82.50
Investment getting period is very long
87.29
Gestation period for repaying investment is too short
91.50
Insufficient time for meeting
49.55
There is no place for organizing meeting
57.85
Need to produce fake buying and selling voucher
29.52
No Islamic school for their children
29.58
Woman has no control on their borrowed money
19.55
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CONCLUSION AND RECOMMENDATIONS
 Conventional microcredit also don't care about the ethical aspects of
the rural poor, though it is obligatory in all aspects of life. Business
and ethics should be interrelated.
 Islamic micro-investment uplift overall socioeconomic plight, also
cares about developing ethics and morals development of the clients as
it can play a crucial role in alleviating poverty.
 This study concentrated on the impact of ethics and morals and its
contribution on poor people’s livelihood.
 Results shows that clients participation in religious activities has
greatly been improved after joining Islamic Micro-finance, there is still
room to improve, especially knowledge on interest, its consequence,
and way to get rid of it. So, frequent lectures in this issue may be
organized, which can assist building clients’ ethics and morality.
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CONCLUSION AND RECOMMENDATIONS
(CONT.)
 Instead of investing their borrowed money to income generating
activities, some of the clients utilised them in house repairing,
children’s marriage ceremony and furniture purchase etc; which is
clearly Shariah violation. So, proper monitoring and supervision should
be done to develop their morals and ethics so that they remain Shariah
complained.
 Murabaha is the only mode is practiced in the study area; which is very
much Shariah violation prone. So, practise of Musharaka along with
Murabaha mode may reduce Shariah violation. Besides, this Musharaka
mode will make clients’ clearly understand the difference between
conventional and Islamic Microfinance .
 Benevolent mechanis m like, Qard, Kafala c an also be prac ti ced
mic rofinance which c an bri ng welfare for the clients . Although Qard is
prac tic ed to provide sani tati on and pure drinking water to the clients but
the areas and amount can be widen.
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CONCLUSION AND RECOMMENDATIONS
(CONT.)
 To alleviate ultra-poor ’s poverty, an integrated approach including
zakat and awqaf would be needed. Government efforts to employment
generation, infrastructure development and electricity generation can
also contribute alleviating ultra-poor ’s’ poverty.
 Demand-led effective training on different aspects of modern on-farm
and off-farm activities, credit management, environmental pollution,
nutrition, health care and ethical development has to provided to
increase the productivity and efficiency.
 Frequent training should be organised for improving the field
supervisors’ knowledge, skill, moral and ethical values.
 Average rate of dropout in microfinance is also alarming. So, the
reason for dropout should be identified. Besides, proper selection of
clients and regular monitoring can reduce the dropout rate.
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THAT IS THE END
THANK YOU
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