How well does government microcredit serve the investment needs of small and medium enterprises? An impact analysis on handloom weavers in Bangladesh

Abstract

PurposeThe purpose of this study is to empirically estimate the impact of a government microcredit program on the handloom weavers to promote small and medium enterprises (SMEs) in Bangladesh.Design/methodology/approachThe data were collected from 311 handloom weavers from the Sirajganj District of Bangladesh from July to December 2015 using a multistage sampling technique. The analysis was conducted using a two-stage least squares regression model incorporating instrumental variables to control for the probable endogeneity problem associated with the study.FindingsThis study finds that government microcredit had no significant impact on borrowers' investment in their business, whereas credit received from multiple sources other than government credit had a significant negative impact. Additionally, literacy level, household assets and the number of operational handloom units positively affected investment, while the number of non-operational handloom units and distance negatively affected the investment.Research limitations/implicationsThis study's findings are more specific for the selected case and may not be generalizable to all kinds of SMEs.Practical implicationsThe policy implications are targeted at increasing loan size based on the number of operational handloom units to improve the performance of government and other microcredit programs to facilitate the growth of SMEs in Bangladesh.Originality/valueThis study specifically focuses on estimating the financial performance of government microcredit programs for SME development within the handloom industry, which has not been sufficiently explored in the literature.

Social capital and loan credit terms: does it matter in microfinance contract?

“…It suggests that providing loans to microenterprises on favorable terms and conditions (sufficiency of the loan amount, charging reasonable/affordable interest rate and flexible repayment schedule) will enhance their loan repayment performance (better repayment rate, regular payment of debt as cum due and sufficiency of net income to pay the outstanding debt). The result is consistent with previous studies (Aslam et al, 2020;Love et al, 2016;Jote, 2018;Maiti et al, 2020;Ngonyani and Mapesa, 2018;Parvin et al, 2020).…”

“…Hence, the size of loans and interest charged by MFIs has become a debatable issue in the context of microenterprises. It is propounded that providing microenterprises with a higher loan size will decrease the probability of loan delinquency and loan default (Parvin et al, 2020). In this accord, microenterprises that receive a lower loan amount will probably face loan repayment problems due to shorter time and lower return on investment whereas those who receive a large loan will have a more extended period for repayment, accept a higher return on investment, and pay their outstanding loans without experiencing any problems (Ojiako et al, 2014).…”

LOAN CHARACTERISTICS & LOAN CREDIT TERMS: DOES IT MATTER IN A MICROFINANCE CONTRACT?

“…These complications encompass inadequate repayment history, punctual debt settlement hindrance, incapacity to generate business proceeds for loan settlement, and non-achievement of loan objectives. This conclusion is bolstered by numerous empirical investigations that corroborate analogous findings (Aslam, Kumar, & Sorooshian, 2020;Jote, 2018;Maiti, Esson, & Vukovi, 2020;Ngonyani & Mapesa, 2018;Parvin, Birner, & Mila, 2020;Ojiako, Idowu, & Ogbukwa, 2014;Obokoh, Monday, & Ojiako, 2016;Ishfaq and Chaudhary, 2003;Nanayakkara & Stewart, 2015;Iqbal et al, 2020;Amoako, 2016;Lassoued, 2017;Ranjani & Kumar, 2018).…”

“…As a result, the amount of loans and interest charged by MFIs in the context of microenterprises has come up for debate. It is believed that granting microbusinesses larger loans will decrease the likelihood of loan default and delinquency (Parvin, Birner, & Mila, 2020). In addition, MFI lending products have some distinctive characteristics that address the issues of information asymmetry and moral hazard and then address the problem of loan payback.…”

Does multiple borrowing and COVID-19 pandemic matter in a microfinance contract?

“…The financial accelerator theory is the third theory examined in this study. According to this theory, borrowers postpone debt repayment because of poor business performance caused by many pandemic impacts and external shocks (Parvin et al , 2020).…”