The Role of Microfinance for Income and Consumption Smoothing

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.