The macro impact of microfinance in Bangladesh: A CGE analysis

Abstract

A lot has been written on the impact of microfinance on poverty and well-being at the household level, but little is known about its macro impact. The present paper makes a pioneering attempt to estimate the macro impact of microfinance in Bangladesh. The expansion of microfinance constitutes an important dimension of financial development, which can affect the real economy through multiple channels. The present paper examines how microfinance has affected the gross domestic product (GDP) of Bangladesh by operating through a number of such channels – viz., capital accumulation, productivity improvement, and reallocation of capital and labor among different sectors. A static Computable General Equilibrium (CGE) model has been used in order to capture these transmission mechanisms. The study estimates that microfinance has added somewhere between 8.9% and 11.9% to the GDP of the country depending on the assumptions made about the working of the labour market. The contribution to rural GDP is even higher – between 12.6% and 16.6%. There is scope to refine these estimates further in future research by including additional transmission mechanisms and employing a dynamic version of the CGE model.