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

This paper addresses a number of issues critical for understanding the sources and potential of microenterprise growth. It discusses whether and how better access to finance matters in the profitability and further growth of microenterprise in Bangladesh. The paper analyzes the nationally-representative Household Income and Expenditure Surveys (HIES) data for the year of 2000, 2005, and 2010. It reports that microenterprise investment is financed largely by informal sources such as individual savings and informal loans from friends and relatives. With the advent of MFIs, microcredit is expected to play a bigger role in supporting microenterprise development in rural areas. However, scaling-up microcredit to support progressive microenterprises with diversified loan and competitive products has not been forthcoming as expected. Findings include:

• Rural households draw around 36% of income from an average microenterprise activity;
• Households with income from microenterprises as an additional source of income are much better off than their counterparts that do not operate such income-earning activities;
• Lack of access to affordable finance rather than the non-credit constraints matters most in restricting microenterprise growth;
• Only 8% of microenterprises acquired loans from MFIs to start-up microenterprise activities in 2010.