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Microfinance, Risk Management and Poverty
Mar 2000, Cohen, M. & Sebstad, J.

A full, comparative analysis of microfinance outreach and client coping strategies

The paper seeks to improve understanding of the extent to which sustainable microfinance programmes reach poor households and contribute to poverty reduction. It focuses on selected non-income dimensions of poverty, specifically those related to risk, vulnerability, and assets. Main implications of the study point to means to improve microfinance products, services and delivery mechanisms. They show the need to:

Match products to clients' needs by developing financial products, services, and delivery mechanisms that meet the financial needs of a wider spectrum of households
Match repayment amounts and cycles to clients' needs to improve a client's capacity to repay and borrow over the long term and thereby reduce the risk of borrowing for them, as well as reduce the risk of lending for the MFI
Match loan size to clients' needs: Poorer borrowers need flexible and timely products with bite-size, manageable repayments. For better-off households, larger loan sizes could enable them to take advantage of investment opportunities with potentially higher returns
Examine the demand for individual loans to offer alternatives to the high borrower transaction costs associated with group lending systems
Increase services to vulnerable non-poor households :Economic stress events and shocks can push this group below the poverty line while they are in a better position to take risks and invest in employment-generating enterprises
Examine financial flows and repayment cycles by looking more closely at the match between household financial and investment flows and loan and repayment cycles
Broaden the range of products and services: Improved housing and education are perceived as pathways out of poverty for the poor, suggesting the potential for developing housing and education loans or savings products
Increase product flexibility, focusing on emergency loans which could help clients recover from such events more quickly as they continue to pay their loans and stay in programmes
Provide insurance products as study results suggest a potential role for insurance products to help clients cope with frequent, idiosyncratic risks such as ill health or death of a family income earner. All are potentially insurable risks
Increase individual savings opportunities: there is a role for more accessible and private savings that are not linked to borrowing and that can be used to deal with anticipated and unanticipated risks and day-to-day economic stresses

Implications for policy highlight

The importance of client perspectives in improving the outreach, impact, and sustainability of microfinance programmes which requires an awareness of (1) the economic goals of poor households, (2) how people manage resources and activities in the context of their household economic portfolios, and (3) how they deal with risk in their day-to-day lives
The critical relationship between risks facing borrowers and risks to the MFI portfolio: Products, services, and delivery mechanisms that are designed to improve the capacity of clients to deal with risk in their lives (reduce their vulnerability) and to reduce the risk of taking a loan can lead to better repayment, fewer dropouts, and, accordingly, lower operating costs
A broader role for financial services to support the livelihoods of the poor: The concept of livelihood is a broader than that of enterprise development. It considers a mix of resources, activities, and capabilities that enable individuals and households to pursue their economic goals. In reality, resources within households are fungible, and it is important to recognise that clients will use microfinance services for a variety of purposes.

A continued role for donor investment in microfinance programmes: The demonstrated role of microfinance in reducing vulnerability for clients and their households points to a role for continued donor investments in microfinance programmes. [adapted from author],The study focuses on clients from selected microfinance institutions (MFIs) in Bangladesh, Bolivia, the Philippines and Uganda.

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Publisher(s):
USAID - Assessing the Impact of Microenterprise Services