Microfinance and Investment: A Comparison with Bank and Informal Lending

Abstract

Summary Comparing the impact of different types of credit on households’ investment in Bangladesh, we find that loans from microfinance institutions are likely to be channeled toward non-agricultural activities while both informal and bank lending are associated to a higher expenditure in agricultural inputs. Estimated effects are net of the differences in the amount borrowed, interest rates, and collateral. Results suggest that features which are specific to microfinance—such as tight repayment schedules and land-based eligibility rules—may reduce the suitability of this source of funds for the farming sector.