Paper
Product Innovation for the Poor: The Role of Microfinance
Examining how MFIs can use product innovation to help poor clients smoothing income and consumption
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2 pages
This policy brief reviews evidence and draws lessons regarding the role of microfinance for income and consumption smoothing by the poor. It highlights potential areas for product innovation by the microfinance sector to address the demand for financial services for income and consumption smoothing.
The brief states that the potential of microfinance to smooth income and consumption increases in proportion to the poverty levels of clients. MFIs that seek to benefit the poor should concentrate more effort on credit, savings, and insurance services that can mitigate risks. Conclusions include:
- Microfinance can help to address idiosyncratic risks, such as those related to health, disability, old age, and divorce;
- MFIs improve their potential to help clients' address covariant risks as they increase in scale and increase their outreach;
- MFIs offer innovative products such as flexible saving services, consumption credit, and health and life insurance;
- MFIs' costs of targeting the poor may decrease through pro-poor product innovation;
- MFIs that choose to broaden their offering of financial services must be aware of portfolio and liquidity risks;
- MFIs should first target areas with low covariant risks, and gradually expand client outreach to higher risk areas.
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