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

In less-developed economies such as Bangladesh where the farm sector is the major source of employment and income, the rural nonfarm sector (RNF) often as an additional source of income increasingly plays an important role in fostering the development of the rural economy, and microenterprise activities constitute a significant share of this sector. However, the key to participation in such activities requires investment and access to adequate funds. This paper investigates the role of access to finance in promoting efficiency and growth of microenterprise activities. Our findings suggest that the households engaged in microenterprise activities besides farm and other nonfarm activities are much better off (in terms of income, expenditure and poverty) than those who do not engage in such activities. However, 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. Our findings suggest that credit constraints may reduce the enterprise profit margin by as much as 13.6 percent per year. As such, further in-depth studies should explore why microfinance institutions (MFIs) have not been more helpful in promoting microenterprise growth in Bangladesh.