Effect of Microfinance on Vulnerability, Poverty, and Risk in Low Income Households

This paper investigates whether or not participation in self-help-groups (SHGs) reduces poverty and vulnerability. It develops a theoretical framework to examine the mechanisms through which the pecuniary and non-pecuniary effects of the SHG program on the beneficiaries earnings and empowerment influence their households ability to manage risk. The paper uses a vulnerability measure which quantifies the welfare loss associated with poverty as well as different types of risks like aggregate and idiosyncratic risks. Further, it applies this measure to an Indian panel survey data for 2000 and 2003, and finds that:

• SHG members have lower vulnerability as compared to a group of non-SHG (control) members;
• Poverty contributes to about 80 percent of the vulnerability faced by the household followed by aggregate risk.

The paper concludes with policy implications and suggestions towards a better understanding of vulnerability.