Flexible Financial Products in Microfinance to Address Risk

Permanence of uninsured risk has been shown to restrain investment, growth, and welfare for poor households in developing countries. This study reviews, in both theory and practice, how flexible financial products can be combined to deal with risk as a complement to insurance. It shows that both savings and credit must be used sequentially according to the occurrence of income shocks. Incentives to save are necessary to induce behavior consistent with the desired optimum savings plan, and these incentives can be made compatible with the use of savings for shock response. 

Several microfinance institutions have taken steps toward offering flexible savings-credit-insurance services to respond to risk while preserving borrower and depositor discipline. They however still fall short of a design that would optimize the provision of financial services to deal with risk. This document provides a description and evaluation of 14 different flexible financial products which are designed to be feasible for both borrowers and lenders.