Returns to Microcredit under External Shocks

This study examines the returns to microcredit amid external shocks, focusing on how the COVID-19 pandemic affected the performance of micro, small, and medium enterprises (MSMEs) in Sri Lanka. Based on primary data from 508 MSMEs across three districts, 57% of firms reported profit declines during the pandemic, with an average reduction of 37%. Credit-only recipients and non-recipients saw profit drops of 32% and 29%, respectively, while those who received both credit and additional support services (credit-plus) experienced a much smaller decline of around 10%. This highlights the potential for a 20% gain when complementary interventions are in place. The regression results show that education, financial literacy, experience, and risk tolerance enhanced business resilience. The performance of the MSMEs that used digital tools for their marketing and utilized training opportunities performed better than other firms during external shocks. The findings emphasize the need for integrated policy frameworks that consider firm-specific and socioeconomic characteristics to strengthen MSME resilience during future crises.