The future of microfinance in Bangladesh

Editor's note: This article is part of a series of posts reflecting on how the evidence from VoxDevLits applies to specific contexts. This post explores how evidence on Microfinance relates to Bangladesh.

Bangladesh is the birthplace of microfinance: formal financial services for the poor. In 1976, Dr. Mohammad Yunus famously tested the idea of lending to the poor with his own money, leading to the founding of Grameen Bank in 1983. However, BRAC began providing microloans in rural Bangladesh as early as 1973 (BRAC USA 2025). In half a century, microfinance has become a global phenomenon, and in 2006, Dr. Yunus and Grameen Bank received the Nobel Peace Prize for their efforts to “create economic and social development from below”. As of 2023, 731 microfinance institutions (MFIs) were operating in Bangladesh, serving about 31.5 million borrowers, of whom 4.2 million are microenterprises.

One key benefit of microcredit is its ability to enable borrowers to manage risks and volatility more effectively, achieved through consumption smoothing and the ability to buy lumpy assets, such as home improvement or a television (Johnston and Morduch 2008, Kaboski and Townsend 2012, Breza and Kinnan 2021, Lane 2024). This is appealing in a context of uncertain and inconsistent income, a common, prominent feature among the world’s poor.

However, evidence from around the world suggests that traditional microcredit – small loans, group-based liability, and frequent repayment without a grace period – does not have a transformative effect on the economic lives of the poor, failing to translate into higher profit, income, consumption, or any other socioeconomic improvement (Cai et al. 2025).

In Bangladesh, the evidence is mixed. For example, a national panel survey (1991–92 to 2010–11) finds a range of significant impacts on borrowers’ consumption, assets, income, and expenditure, as well as labour supply (Khandker and Samad 2014). But a meta-analysis of eight Bangladesh-specific studies contradicts this, finding no significant impact on income and assets, and a significant but small positive impact on consumption (Churchill et al. 2016).

How can microfinance become more impactful? Using the VoxDevLit on Microfinance (Cai et al. 2025), I investigate this question by examining how its varying impacts can inform better targeting and product innovation that match borrowers’ needs. I also discuss available relevant evidence from Bangladesh, including examples of product innovations and the challenges of scaling up.

Greater impact through an enterprise focus?

Evidence from across contexts has shown that the effects of microfinance vary by borrower. An RCT in Uganda finds a gender difference in the impact of microfinance on entrepreneurs (Fiala 2018). Male entrepreneurs report that loan experience has a significant positive impact on their profits and sales, whereas no such impact was observed in female entrepreneurs. But Bernhardt et al. (2019) posit that such a difference may arise from household dynamics – with households directing more capital towards male-owned enterprises while discounting opportunities in female entrepreneurship. In other words, female borrowers tend to have limited control of their borrowed money.

Evidence from Bangladesh, again, is mixed. Quasi-experimental evidence from an entrepreneurship development programme for underprivileged youth found that income and self-employment increased for all participants, but the impact was significantly larger for females (Khan et al. 2024). Conversely, the impact of business loans during COVID-19 was positive for the profits and sales of male entrepreneurs only; for female entrepreneurs, only food expenditure improved significantly (Arman et al. 2026).

However, research across a range of settings has shown that relevant entrepreneurial experience appears to be a stronger, more consistent predictor of impact. Research in Bangladesh supports this finding, where microloans offered during COVID-19 significantly improved household welfare – mainly through increased business earnings among those who took business-focused loans, while the impact of poverty-focused loans was muted (Arman et al. 2026), with recipients less likely to become entrepreneurs. These findings suggest that targeting promising entrepreneurs with business-focused loans may serve as a promising mechanism to achieve lasting impact.

Many Bangladeshi MFIs now provide enterprise loans to micro and small enterprises, offering larger, longer-term loans based on needs. These loans address a critical gap in Bangladesh’s financial system, where formal financing facilities for small enterprises are scarce.

I recently interviewed the managing director of the Palli Karma Shahayak Foundation (PKSF), Md. Fazlul Kader, to learn about the challenges and ongoing innovations in the microfinance space in Bangladesh. PKSF is the apex government microfinance body in Bangladesh, serving 20 million families across the country through more than 200 partners. PKSF’s approach is to introduce and diffuse microfinance-related innovations through its extensive network of partner organisations.

PKSF focuses on innovations relevant to enterprise development and uses a cluster approach, identifying potential industry clusters to extend microcredit across the enterprise ecosystem, alongside other services, specifically those that address industry bottlenecks. PKSF is also actively working towards establishing a blended financing model, that is, equity-debt financing for larger enterprises.

Standard microfinance caters to low-risk microenterprises, but as businesses grow, they need larger, riskier, and more patient capital investments. PKSF is hence exploring a partnership with potential financiers to absorb the risk, while MFIs would provide complementary low-risk loans. PKSF has also introduced a credit guarantee facility to help partner organisations draw in more commercial finance for microenterprise lending through its Microenterprise Financing and Credit Enhancement project.

Thinking beyond the traditional model for greater impact 

In recent decades, different variations of the classic model – group-based lending and frequent, small repayments – have been introduced, and evidence is emerging on the efficacy of the traditional features vis-à-vis these variations, providing valuable insights about possible product diversification for greater impact.

Recent lab experiments indicate possible negative consequences of group-based lending, such as free-rider problems, especially in contexts of weak social cohesion (Fischer 2013) and excessive peer punishment (Czura et al. 2020). And experimental evidence is emerging that there is no difference in repayment between group and individual liability, irrespective of whether the repayment is public – working as “peer pressure without legal pressure” (Giné and Karlan 2014) – or private (Attanasio et al. 2015). On the other hand, individualised microcredit may attract high-risk clients while driving away risk-averse individuals who would otherwise have benefited from borrowing for a productive investment (Attanasio et al. 2019).

There is a strong argument for dynamic incentives – offering increasingly large loans or better rates based on prior repayment behaviour – to address the challenges of individualised microcredit. In a field experiment, Giné et al. (2012) find that combining strong identification with dynamic incentives improves repayment in two ways: smaller initial loan size improves participation from low-risk clients, and stronger identification, for example, using biometrics, deters diversion of borrowed funds away from the intended purpose, such as buying consumer durables with funds received for farming. Karlan and Zinman (2009) show that dynamic interest-rate incentives have a similar positive impact on repayment.

Payment flexibility is another consideration. Typically, microfinance repayment starts within two weeks of loan disbursement. However, evidence shows that a monthly payment schedule not only lowers the cost of administering the loan but can also increase long-term business profits and household incomes (Field and Pande 2008, Field et al. 2013). In Bangladesh, BRAC has introduced an innovative solution to this, providing two vouchers, each allowing a month of delayed repayment at the client’s choice, essentially offering flexibility to buy a lumpy asset if needed and some level of insurance against unforeseen circumstances. Battaglia et al. (2024) find that these clients accumulated 51% more business assets, 25% higher profits, and had a lower default rate than those who did not receive these vouchers.

In Bangladesh, PKSF has introduced several innovative instruments, including ‘bullet payment’, in which a larger share of repayment falls later, and ‘bell-shaped payment’, in which the largest share of payment comes in the middle, both of which are designed to match enterprise cash flow rather than the standard payment schedule.

BRAC has scaled up the voucher in its Ultra-Poor Graduation (UPG) programme. Relatively better-off UPG programme participants purchase their productive assets with an interest-free loan from BRAC and receive four vouchers, each allowing a 15-day repayment delay. However, voucher utilisation in the programme is low, according to the UPG management. Perhaps payment flexibility is more crucial for higher-risk, higher-value enterprises than for small, lower-risk livelihood ventures typical of UPG participants.

Finally, flexible payment may also present challenges. Flexibility offered to inexperienced or first-time borrowers may increase the default rate (Brune et al. 2022, Field et al. 2013), while structured repayment can improve borrowing rates when the default rate is high (McIntosh et al. 2023).

Digitalisation in microfinance: Promises and challenges

Digital technology, particularly mobile money, has emerged as a potential avenue for improving the cost structures of microfinance institutions (Suri et al. 2023). The digitalisation of microfinance also offers many opportunities for product diversification with potential welfare impacts. Research shows that microcredit disbursement through digital finance has a significant positive impact on recipient women’s business performance and household decision-making (Riley 2024, Heath and Riley 2024). This impact is particularly strong among women who faced greater pressure to share family finances, indicating that mobile payments significantly improve women’s control over their borrowed money.

Many of these product innovations also hinge on the level of digitalisation, according to Md. Fazlul Kader (PKSF). He believes that diversified, customised products can be efficiently offered at scale when an integrated information management system is implemented, enabling decision-makers to track the transaction history and financial behaviour of their customers, not just the digitalisation of loan disbursement and repayment. However, the digitisation of microfinance in Bangladesh faces several regulatory, managerial, and behavioural challenges.

While it is difficult to ascertain the share of digital microfinance transactions in Bangladesh, an interview with an industry expert suggests it likely hovers around 10%. Currently, most major MFIs can process disbursements and repayments digitally. However, the payment must be done through a third-party mobile financial service (MFS), which involves a small fee. To promote digitalisation, MFSs or MFIs often absorb the cost of withdrawing the disbursed amount. However, the MFIs decide whether the ‘settlement fee’, that is, the MFS charges associated with repayment, will be borne by the client. 

In the Bangladeshi context, digitalisation does not yield substantial cost savings for MFIs, as the role of field staff does not centre solely on collection. As such, MFIs are not incentivised to bear the settlement fee. Also, unlike regulated financial institutions, MFIs in Bangladesh are not allowed to conduct direct digital transactions with their clients. Consequently, in most cases, the charge falls on the client. Hence, uptake is low.

Mr. Kader mentioned that if MFI clients could shift the majority of their business and personal transactions to mobile money, the costs of digital transactions would decline significantly, making digital microfinance more viable. He believes that the introduction of the interoperable Bangla QR in 2025 marked a significant step in this direction. He also mentioned that if microentrepreneurs can open merchant accounts themselves, the cost of funds would fall further.

But that brings us to a second challenge in this space: Bangladesh’s considerable technology-aversion. MFS providers offer training and product features, such as double-checking account numbers. However, growth remains slow, and industry experts believe that Bangla QR will have an impact only at the margin, if any.

A low adoption rate also translates to a thin digital footprint for microfinance clients. The lack of a centralised database, reliable commercial banks, and efficient field inspection practices prevents MFIs from introducing low-cost, diversified, and customised microfinance products. This prevents microfinance institutions from scaling for greater impact.

Policy implications for microfinance in Bangladesh

Bangladesh’s banking sector is going through a crisis, with a staggering ratio (30.6%) of non-performing loans (NPL). Even in the microfinance sector, with a historically low default rate, NPL has doubled in recent years – from 2.7% in 2018 to 6.7% in 2022. Strong inflationary pressure over the last five years, combined with a vulnerable banking sector, has naturally created a tense lending environment in the microcredit sector, with negative consequences for product innovation and diversification. The most immediate impact is on the loan size and cost of lending. Due to inflation, the loan amount needs to be revised, but the current volatile situation and high NPL ratio disincentivise MFIs from revising it, leaving interest rates too high to absorb the risk of default.

Bangladesh’s microfinance experience, combined with global evidence, suggests that the central issue is no longer access alone, but fit with clients’ diverse needs, and not one-size-fits-all. Microcredit remains valuable where households need stability, working capital, and protection against shocks. But once the goal shifts towards enterprise growth, employment, and higher returns, finance has to become more flexible, better timed, and more closely aligned with business reality. That is why recent developments in Bangladesh, from repayment innovation and blended finance to digital financing, matter. The country is moving in this direction, but progress remains slow and uneven, disrupted by the ongoing political and financial crisis.

References

Arman, M R, N Das, S Mahmood, S Rahman, and K W Rahman (2026), "The impact of microcredit on household welfare: Evidence from Bangladesh during the COVID-19 pandemic," Journal of Development Studies, 62(2): 286–307.

Attanasio, O, B Augsburg, R De Haas, E Fitzsimons, and H Harmgart (2015), "The impacts of microfinance: Evidence from joint-liability lending in Mongolia," American Economic Journal: Applied Economics, 7(1): 90–122.

Attanasio, O, B Augsburg, and R De Haas (2019), "Microcredit contracts, risk diversification and loan take-up," Journal of the European Economic Association, 17(6): 1797–1842.

Battaglia, M, S Gulesci, A Madestam, M Puri, and K Roszbach (2024), "Repayment flexibility and risk taking: Experimental evidence from credit contracts," Review of Economic Studies, 91(5): 2635–2675.

Bernhardt, A, E Field, R Pande, and N Rigol (2019), "Household matters: Revisiting the returns to capital among female microentrepreneurs," American Economic Review: Insights, 1(2): 141–160.

BRAC USA (2025), "Case study: How financial inclusion can erase extreme poverty," 9 December.

Breza, E, and C Kinnan (2021), "Measuring the equilibrium impacts of credit: Evidence from the Indian microfinance crisis," Quarterly Journal of Economics, 136(3): 1403–1440.

Brune, L, X Giné, and D Karlan (2022), "Give me a pass: Flexible credit for entrepreneurs in Colombia," NBER Working Paper No. 30634.

Cai, J, M Meki, S Quinn, E Field, C Kinnan, J Morduch, J de Quidt, and F Said (2025), "Microfinance," VoxDevLit, 3(3).

Awaworyi Churchill, S, J Korankye Danso, and S Appau (2016), "Microcredit and poverty reduction in Bangladesh: Average effects beyond publication bias," Enterprise Development & Microfinance, 27(3): 204–218.

Czura, K, A John, and L Spantig (2020), "Flexible microcredit: Effects on loan repayment and social pressure," CESifo Working Paper No. 8322.

Field, E, and R Pande (2008), "Repayment frequency and default in microfinance: Evidence from India," Journal of the European Economic Association, 6(2–3): 501–509.

Field, E, R Pande, J Papp, and N Rigol (2013), "Does the classic microfinance model discourage entrepreneurship among the poor? Experimental evidence from India," American Economic Review, 103(6): 2196–2226.

Fiala, N (2018), "Returns to microcredit, cash grants and training for male and female microentrepreneurs in Uganda," World Development, 105: 189–200.

Fischer, G (2013), "Contract structure, risk-sharing, and investment choice," Econometrica, 81(3): 883–939.

Giné, X, and D S Karlan (2014), "Group versus individual liability: Short and long term evidence from Philippine microcredit lending groups," Journal of Development Economics, 107: 65–83.

Giné, X, J Goldberg, and D Yang (2012), "Credit market consequences of improved personal identification: Field experimental evidence from Malawi," American Economic Review, 102(6): 2923–2954.

Heath, R, and E Riley (2024), "Digital financial services and women’s empowerment: Experimental evidence from Tanzania," CEGA Working Paper.

Johnston, D, and J Morduch (2008), "The unbanked: Evidence from Indonesia," World Bank Economic Review, 22(3): 517–537.

Kaboski, J P, and R M Townsend (2012), "The impact of credit on village economies," American Economic Journal: Applied Economics, 4(2): 98–133.

Karlan, D, and J Zinman (2009), "Observing unobservables: Identifying information asymmetries with a consumer credit field experiment," Econometrica, 77(6): 1993–2008.

Khan, T N, A Bhattacharjee, N Das, M A Hossain, A Rahman, and A Tabassum (2024), "The impact of entrepreneurship training and credit on the labour market outcomes of disadvantaged young people," Development in Practice, 34(2): 188–210.

Khandker, S R, and H A Samad (2014), "Dynamic effects of microcredit in Bangladesh," World Bank Policy Research Working Paper No. 6821.

Lane, G (2024), "Adapting to climate risk with guaranteed credit: Evidence from Bangladesh," Econometrica, 92(2): 355–386.

McIntosh, C, I Meza, J Sadka, E Seira, and F J DiTraglia (2023), "The controlled choice design and private paternalism in pawnshop borrowing," Working Paper.

Riley, E (2024), "Resisting social pressure in the household using mobile money: Experimental evidence on microenterprise investment in Uganda," American Economic Review, 114(5): 1415–1447.

Suri, T, J Aker, C Batista, M Callen, T Ghani, W Jack, L Klapper, E Riley, S Schaner, and S Sukhtankar (2023), "Mobile money," VoxDevLit, 2(2).

Uddin, M M (2026), "The banking sector's dangerous free fall while defaulters thrive," The Daily Star, 13 May.

World Bank (2026), "Inflation, consumer prices (annual %) – Bangladesh," World Development Indicators.