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The purpose of this study is to empirically estimate the impact of a government microcredit program on the handloom weavers to promote small and medium enterprises (SMEs) in Bangladesh.

The data were collected from 311 handloom weavers from the Sirajganj District of Bangladesh from July to December 2015 using a multistage sampling technique. The analysis was conducted using a two-stage least squares regression model incorporating instrumental variables to control for the probable endogeneity problem associated with the study.

This study finds that government microcredit had no significant impact on borrowers' investment in their business, whereas credit received from multiple sources other than government credit had a significant negative impact. Additionally, literacy level, household assets and the number of operational handloom units positively affected investment, while the number of non-operational handloom units and distance negatively affected the investment.

This study's findings are more specific for the selected case and may not be generalizable to all kinds of SMEs.

The policy implications are targeted at increasing loan size based on the number of operational handloom units to improve the performance of government and other microcredit programs to facilitate the growth of SMEs in Bangladesh.

This study specifically focuses on estimating the financial performance of government microcredit programs for SME development within the handloom industry, which has not been sufficiently explored in the literature.