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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.

This paper aims to examine the governance challenges confronted by a government microcredit program in Bangladesh following a case study approach.

A novel qualitative research tool called process net-map (PNM) was applied to develop a framework for visual understanding of the exact credit implementation process and to identify the actors responsible for creating governance challenges. Key informant interviews were also conducted to identify and distinguish the challenges faced by both the supply-side and demand-side stakeholders.

The findings reveal that the studied case faced problems in allocating adequate resources to human and physical capacity development. It was combined with the shortage of funds that made it impossible to meet the clients’ expectations. The lack of legal and regulatory framework disabled the organization from controlling political influence and corruption in the system. Moreover, the policy of lending only to groups proved counterproductive as it led to the exclusion of potentially viable borrowers.

The key recommendation of the study is on increasing the microcredit fund and a reform of the group lending policy along with several other recommendations.

The PNM is a newly developed participatory mapping technique that has not been applied in the field of microfinance. Therefore, the use of this method may add new knowledge of conducting an in-depth analysis of why such challenges are associated with mostly public microfinance programs and how they are linked to the implementation process. The challenges encountered are relevant for the implementation of developmental programs that are dependent on the allocation of public funds.