The Effect of Nonagricultural Self-Employment Credit on Contractual Relations and Employment in Agriculture: The Case of Microcredit Programs in Bangladesh

This paper estimates the impact of participation in three group-based microfinance programs: Grameen Bank; Bangladesh Rural Advancement Committee (BRAC); Bangladesh Rural Development Board's (BRDB) Rural Development RD-12 program. It uses the data sources based on gender, land wonership, contracts and modes employment.

Argues that there is strong evidence to suggest that participation in group-based micro-credit programs substantially alters the mix of agricultural contracts chosen by participating households:

• There is a significant increase in own-cultivation through sharecropping coupled;
• A complementary increase in male hours in field crop self-employment;
• A reduction in male hours in the wage agricultural labour market;
• There is no strong effect of program credit on the fixed rental of land and it is a type of contractual relationship that is not common among the landless poor in Bangladesh.

The paper finds that the results are consistent with the hypothesis that micro-credit financed non-agricultural self-employment projects induce households to choose higher risk agricultural contracts. The risky nature of agricultural and the need to smooth consumption, coupled with absent or incomplete markets for insurance and credit, importantly determine the mix of agricultural activities that households undertake in rural South Asia. Landless cultivators are more likely to have their contractual choices shaped by credit market constraints than others.

The paper concludes that:

• Both female and male credit induce a substitution of male agricultural activity from the wage labour market to own-cultivation;
• This is consistent with the effect of credit in diversifying income and smoothing consumption, outcomes;
• These permit households to choose higher return but riskier agricultural contracts.