Microfinance and Unexpected Consumption Expenditures

Exploring role of microfinance in paying for unexpected expenditures
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This paper focuses on the poor’'s limited access to capital and their high interest rates for borrowing. It describes ways in which microfinance helps the poor in periods when they have a strong desire to consume more than their current income.

The paper presents findings of a 2007 survey administered to 5500 SKS Microfinance client households in rural India. Findings indicate that:

  • Respondents do not often report using microfinance for health expenditures, they tend to opt for moneylenders, family and friends;
  • SKS Microfinance has an emergency health loan program, but most respondents were unaware of it;
  • SKS’'s health insurance policy with a cashless network was much more popular with clients than up-front payment and reimbursement;
  • Credit and insurance are much closer substitutes for the poor in developing countries.

Some aspects of data suggest that microfinance might be used more for health events or other unexpected consumption expenditures if funds were available quickly and without group liability. Introducing new financial products can help fulfil unmet demand, and also present an opportunity to identify underlying factors influencing availability and use of different credit sources.