The Role of Microfinance for Income and Consumption Smoothing

Can Microfinance help smoothen cashflows for households?
Download 25 pages

This paper seeks to assess the role of microfinance for income and consumption smoothing by the poor. It provides a conceptual framework distinguishes between credit, savings and insurance services, and identifies two principal pathways through which access to financial services can enhance income and smooth consumption:

  • Enhancement of the capital base for future income generation for smoothing anticipated income;
  • Actions that can be taken in the event of transitory income shocks so as to smooth disposable income, thereby smoothening consumption.

The author also discusses:

  • Expected change in demand for financial services with increasing level of poverty and risk exposure of the household or individual;
  • Types of risks faced by households;
  • Potential areas for product innovation by the microfinance sector to address risks and shocks in income-flows.

The paper concludes with policy recommendations for the design and implementation of microfinance schemes that respond to:

  • Income and accumulation motive of households;
  • Their desire to safeguard their consumption of food and other basic needs through income and consumption smoothing.

About this Publication

By Zeller, M.