JBS Special Issue - Microfinance - 2012 - The Real Effect of Micro-credit in Bangladesh: Rural Redistribution and Transformations

Micro-credit provides funds to low income entrepreneurs who have previously been unable to borrow. The loans are
transmitted to the real economy, changing the allocation of resources and the distribution of incomes. This paper
draws on the findings from previous work by the author, which uses a computable general equilibrium model of
rural household production and labor allocation, to analyze the effects of micro-credit infusion. After initially
providing a background through a survey of scholarly work, the paper describes the framework and the findings.
Micro-credit is found to redistribute income to poor households, increasing their consumption and welfare, and to
increase the value of female labor, drawing females away from market work to self-employment within the
homestead. The paper then returns to a review of the literature to draw a comparison with other research on the uses
and impact of micro-credit. The updated literature shows that the role of micro-credit institutions was not so much to
flush capital into the countryside, but to smooth consumption and create a dense network of communication and off-
farm economy within the countryside. These enabled a modernization of rural household preferences, thereby
increasing the demand for credit in the future.