Impact of Microfinance on Informal Employment: The Case of Bangladesh

Farhana Shahnaz, Golam Samin Rahman and Bushra Humaira Sadaf

The rapid growth of urban-rural migration, characterized by environmental, economic or demographic crises, has been a topic of resolute attention in recent times in the context of Bangladesh. The inherent rural-urban wage differential, primarily, has led to a massive influx of rural migrants to the city, in hopes of better employment opportunities over the years. However, the constraints in the absorptive capacity of the rural job sector have led to the formation of a rural informal sector that hosts the excess labour. Although estimated to be about 89% of the total number of jobs in the labor market, the informal sector’s contribution to the process of economic growth and national development is almost insignificant. This sector still has untapped potential which may be leveraged with the proper tools. Financial services, in the form of microfinance, to the informal sector can be a driver for job creation and substantial growth. It may, therefore, be hypothesized that the aggregate impact of microfinance on the overall informal employment is positive. Using an analytical exercise, this study finds that microfinance can effectively help alleviate informal employment. Bangladesh can thus utilize its extensive microfinance operations to achieve goals of poverty reduction, leading to greater economic development