The Role of Micro-Finance for Income and Consumption Smoothing
The recent policy debate has emphasized micro-credit, but not micro-finance as one of the tools for poverty alleviation (see for example the Micro-Credit Summit in February 1997 in Washington, D.C). Improved access to credit is seen as a potent means for increasing the poor's income. The role of credit for consumption smoothing is rarely mentioned in meetings attended by staff from micro-enterprise or agricultural credit institutions, and savings services seem to be promoted simply for the sake of "mobilizing" capital, disregarding their potential role for smoothing consumption. Except for few micro-finance institutions, the role of insurance for income and consumption smoothing is completely neglected. This paper seeks to assess the role of micro-finance for income and consumption smoothing by the poor. In section 2, a conceptual framework is developed that distinguishes between credit, savings and insurance services, and identifies two principal pathways through which access to financial services can enhance income and smooth consumption. I further discuss how the demand for these services is expected to change with increasing level of poverty and risk exposure of the household or individual. In section 3, the types of risks faced by households are presented. I then highlight potential areas for product innovation by the micro-finance sector to address these risks. Section 4 discusses the potential and limits of micro-finance services in assisting households to cope with adverse shocks. This section also provides a non-exhaustive list of examples of innovations already implemented by selected micro-finance institutions that seek to address the demand for financial services for smoothing income consumption. Section 5 concludes with policy recommendations for the design and implementation of micro-finance schemes that not only respond to the income and accumulation motive of households but also to their desire to safeguard their consumption of food and other basic needs via measures of income and consumption smoothing.
Last updated: 04/26/07
