Does microfinance change informal lending in village economies? Evidence from Bangladesh

This paper examines how availability of microfinance influences households' borrowing from informal sources in village economies. It uses a unique household level panel data set, which spans more than two decades (1987-2008), from rural villages in Bangladesh. We find that households' access to microfinance reduces the incidence of borrowing from informal sources, but not the amount of borrowing. There are heterogeneous effects in which less poor households benefit more in terms of reducing their reliance on informal borrowing and the benefit accrues over time. We also find heterogeneity across households with respect to occupation, which can be explained by differing trends in occupational transition between microfinance borrowers and non-borrowers. In terms of gender differences, while women are target clients for MFIs, having access to microfinance increases women's informal borrowing for small consumption usage, without facilitating access to new business opportunities.