Risk Management for the Poor and Vulnerable

How can microfinance institutions help the poor in managing risk?
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This paper reviews literature on the mechanisms available to the poor to manage risk. It argues that:

  • The poor rely on informal mechanisms of risk management, built on existing social networks and trust;
  • However, when they are affected by shocks that impact the entire community, these informal mechanisms may not be adequate;
  • Some policy interventions are then necessary to help them manage risk.

The paper reviews the basic concepts of poverty, vulnerability and risk, and:

  • Discusses the informal mechanisms available to the poor to manage risk;
  • Presents policy options to help the poor in managing risk.

It concludes that:

  • In the long run, policy objective should be to reduce the level of vulnerability to poverty by providing mechanisms to the poor to manage risk;
  • Policy interventions should aim at providing access for the poor to savings, credit and insurance;
  • Microfinance schemes are said to be successful in providing access to savings and credit;
  • However, microfinance institutions (MFIs) still have some room for improvement by expanding their role by providing insurance.

About this Publication

By Perdana, A.