The Impact of Credit and Non-Credit Aspects on Self-Employment Profit: A Comparison of Microcredit Programs and Commercial Lenders in Rural Bangladesh

Rural credit programs in Bangladesh help the poor by providing collateral-free loans or credits at a low cost. In addition, they provide social development programs such as vocational and business training through a group-based peer monitoring system. These non-credit aspects may add to the success of microcredit programs. This article examines the effects of the credit and non-credit aspects of microcredit programs on self-employment profits. Using a household level data and an Instrumental Variable-Fixed Effect approach, the results show that the non-credit social aspects of the microcredit programs affect profit above and beyond the credit aspects and increase self-employment profit by 50% to 81%. This article also compares microcredit programs to existing commercial lenders which do not offer non-credit services. The results show that credit effects are larger while non-credit effects are smaller for commercial loans and demonstrate the efficacy of the non-credit aspects of the microcredit programs in raising profits.