Microfinance in Sustainable Development and Economic Growth in Bangladesh

Abstract

The chapter addresses the role of microfinance in sustainable development and economic growth in Bangladesh. In Bangladesh, microfinance institutions (MFIs) have played a key role in financial inclusion. Due to the expanded outreach of the MFIs, around 43 percent of households have access to financial services. The credit market is uniquely divided between banks and MFIs. Banks are largely concentrated in the urban credit market, and MFIs are mostly concentrated in the rural credit market. Increase in microfinance outreach and loan size is expected to have an impact on poverty reduction and food security as well as economic growth. Analysis of the longitudinal Programmed Initiatives for Monga Eradication (PRIME) data from the north-western region of Bangladesh shows that microfinance complimented by non-financial services has contributed greatly toward increase in financial inclusion, improvement in food security and reduction in multi-dimensional poverty. In comparison to control households, multi-dimensional poverty decreased by 15 percentage points for the program participants. On the other hand, based on literature review and recent estimates of the macro impact of microfinance, it was shown that microfinance had contributed to GDP growth and even largely to real rural GDP growth in Bangladesh. Such macroeconomic impacts are results of the penetration of microfinance, increase in loans for micro enterprises, productive use of microcredit and increase in total factor productivity. However, it is concluded that, in future, macroeconomic impacts will increase further with the current growth of investment in micro and small enterprises and human capital development.