Session Two: Access to Finance and Micro Enterprise Development

The ‘Session Two’ of the National Conference on “Microfinance and Development” was on the theme of Access to Finance and Micro Enterprise Development, based on the papers entitled “Does Access to Finance Matter in Microenterprise Growth? Evidence from Bangladesh” by Dr. Shahidur R. Khandker, Lead Economist, The World Bank.

Finance and Micro Enterprise DevelopmentOn behalf of Dr. Khandker, the paper was presented by Dr. Muhammad Abdul Latif, Director (Research and Knowledge Management), InM. The session was chaired by Dr. Toufic Ahmad Choudhury, Director General, Bangladesh Institute of Bank Management (BIBM) and Dr. Zaidi Sattar, Chairman, Policy Research Institute (PRI) was present as Panelist. Another paper entitled “Access to Credit and Productivity of Enterprises in Bangladesh: Is there Causality?” was presented by Mr. Md. Abdul Khaleque, Lecturer at the Department of Development Studies, University of Dhaka, and former Senior Research Associate, InM.

Dr. Muhammad Abdul Latif, in the presentation, informed that the households engaged in micro enterprise activitiesFinance and Micro Enterprise Development02 besides farm and other non-farm activities are better off (in terms of income, expenditure and poverty) than those which are not engaged in such activities. Fewer than 10 per cent enterprises have access to institutional finance (banks/MFIs) although the rate of return on investment is more than sufficient (52 per cent) to repay institutional loans.

The study found that rural households draw around 36 percent of income from an average micro enterprise, and households with micro enterprise as an additional source of income are much better off in terms of income, consumption, and poverty than their counterparts which do not operate such income earning activities.

An econometric analysis that establishes the causality between micro enterprise participation and household welfare shows that a household’s participation in a micro enterprise raises income additionally by 6 percent and consumption by 5 percent, and consequently reduces moderate poverty by 2 percent and extreme poverty by some 4 percent per year – the study added.

Finance and Micro Enterprise Development05The data showed that more than 70 percent of enterprises’ start-up capital comes from entrepreneurs’ own savings; if borrowing from friends and relatives, it explains more than 85 percent of start-up capital of rural micro enterprises in Bangladesh.

The study also showed the country’s large microfinance institutions (MFIs) may be a major source of support for micro enterprise expansion and growth for a variety of reasons: (a) MFIs have a large network of outreach; (b) they do not require physical collateral to lend; and (c) they charge an effective interest rate close to 32 percent. We find that some 8 percent of micro enterprises acquired loans from MFIs to start-up micro enterprise activities in 2010. The study stated that lack of access to affordable finance for startup capital is perhaps a barrier for micro enterprise growth.

At the other presentation, Mr. Md. Abdul Khaleque mentioned that access to credit contributes to high average labor productivity and Influences total factor productivity positively. Firms with access to credit gain in total factor productivity by more than 176 percent over the counter-factual group. Moreover, gain in average productivity of labor and sales for the firms with access to credit is 13 percent higher than those with no access – the study showed. All these consistent results strongly suggest that firms with access to credit have higher productivity.

Finance and Micro Enterprise Development14The Panelist of the session Dr. Zaidi Sattar said that concept of enterprise need to be redefined as it includes two major sectors, namely, service and manufacturing. Moreover, the definition and the concept of growth in Microenterprise may be settled based on the employment size.

Dr. Sattar also said that access to finance has positive impact on the total productivity. He mentioned that the robustness of econometric model is an important issue for the econometric analysis which is clearly described. He stated that the definition of the enterprise was more appropriate in Dr. Khandaker’s paper. He also mentioned that the enterprise growth in terms of value added will make sense, as it shows the contribution in GDP and the sales quantity will be more appropriate to calculate the productivity in spite of sales revenue.