Does Access to Finance Matter in Microenterprise Growth? Evidence from Bangladesh

51 Pages Posted: 20 Apr 2016

See all articles by Shahidur R. Khandker

Shahidur R. Khandker

World Bank - Development Research Group (DECRG)

Hussain A. Samad

World Bank

Rubaba Ali

World Bank; University of Maryland

Date Written: January 1, 2013

Abstract

In less-developed economies such as Bangladesh, the farm sector is the major source of employment and income, while the rural nonfarm sector provides as an additional source of income. But the rural nonfarm sector increasingly plays an important role in fostering the development of the rural economy. A significant share of this sector is made up of microenterprise activities, which requires investment and access to adequate funds. This paper investigates the role access to finance plays in promoting the efficiency and growth of microenterprise activities. The findings suggest that households engaged in microenterprise activities, in addition to farm and other nonfarm activities, are much better off (in terms of income, expenditure and poverty) than those not engaged in such activities. Fewer than 10 percent of the enterprises have access to institutional finance (formal banks or microcredit), although the rate of return on microenterprise investments is more than sufficient (36 percent per year) to repay institutional loans. The research suggests that credit constraints may reduce the enterprises' profit margin by as much as 13.6 percent per year. As the returns to microenterprise investment are found to be high, microfinance institutions can play a larger role in supporting microenterprise growth in Bangladesh.

Keywords: Access to Finance, Debt Markets, Investment and Investment Climate, Banks & Banking Reform, Economic Theory & Research

Suggested Citation

Khandker, Shahidur R. and Samad, Hussain A. and Ali, Rubaba, Does Access to Finance Matter in Microenterprise Growth? Evidence from Bangladesh (January 1, 2013). World Bank Policy Research Working Paper No. 6333, Available at SSRN: https://ssrn.com/abstract=2206181

Shahidur R. Khandker (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Hussain A. Samad

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Rubaba Ali

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

University of Maryland ( email )

College Park
College Park, MD 20742
United States

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