In this paper, we investigate the role of output market imperfections in constraining the microfinance program to mitigate credit market imperfections. We develop a model in which output market imperfections increase operating costs for NGOs and create barriers for producers to market their goods. Therefore, NGOs engage in locations having good physical infrastructure and better productive and marketing opportunities to minimize operating cost and maximize loan repayment. Using data from northern Bangladesh, we find strong support for the model predictions. NGO coverage in a village, measured both by percentage of NGO member households and number of NGOs working, decreases with distance of the village from marketplace and increases with adoption of modern irrigation method and soil quality. NGOs do not consider poverty incidence in the village. The results have important implications for development economics in general and impact assessment of microfinance program in particular.
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