The impact of microcredit on household welfare: evidence from Bangladesh during the COVID-19 pandemic

Abstract

The onslaught of COVID-19 and the subsequent economic fallout have exacerbated global inequality, with the poor bearing a disproportionate brunt of the pandemic. This paper investigates whether access to credit—in the form of microloans—helped cushion the shock induced by COVID-19 and improved the welfare of poor households. Using survey data on microloan borrowers in Bangladesh, the analysis examines how access to microfinance affected clients during the COVID-19 crisis. A difference-in-differences (DID) methodology is employed to compare borrowers who received loans after the outbreak of the pandemic with those who did not. The results suggest that receiving microloans leads to increased business earnings, improved food security, and higher food expenditure. These effects are mainly driven by recipients of business-focused loans, while the impact of loans targeting poverty reduction appears limited.