Purpose: More than 40 percent of the population of Bangladesh remains below the national poverty line despite the many poverty reduction policies initiated over the last four decades. Although Rural Non Farm Economy (RNFE) is sometimes considered a means of poverty reduction, there is a considerable controversy over whether RNFE concentrates most of its income to but a few wealthy households while keeping the majority of its participants in poverty. Theoretical perspective and methodology: To explore this issue in depth, empirical data collected from RNFE participants in three districts of Bangladesh was analyzed using Sen’s capability theory (1979, 1983, 1987, 2000, 2004), and the latent factors of capability suggested by Narayan et al. (2000) were used to construct a composite index of multidimensional poverty. Purpose/ Originality: Unlike other earlier studies, this index measures the extent to which a specific RNFE policy intervention by the Government and NGOs may reduce poverty. Findings: For example, empirical data suggests that poverty in RNFE has a high positive correlation with inadequate access to health care services, education and credit, but has a marginal correlation with improved road infrastructure. Finally, this study shows that the rich stock of social capital among poor RNFE participants in Bangladesh could be an effective tool for the supply of capital goods to RNFE participants with limited credit. Practical and Social implications: The findings of this study will assist policy makers to make more informed policy interventions that will have a greater potential to reduce poverty through RNFE development in Bangladesh.