Evaluating impact of access to finance for households

Recent evidence suggests that finance is not only pro-growth, but also pro-poor.  Countries with better developed financial systems experience faster reductions in income inequality and poverty. 

What are the channels through which finance impacts the poor?  Existing evidence suggests that indirect second-round effects through more efficient product and labor markets might be more important effects of access to credit. Hence improving financial access in a way that most benefits the poor requires a strategy for inclusion that goes well beyond credit for poor households: it is important to broaden the focus of attention to improving access for all who are excluded.

Fostering more efficient capital allocation through competitive and open financial markets still remains an important policy goal both for growth and poverty reduction.

 

 

 

 

 

 

Although the effectiveness of these and other innovations is still being debated, over the past few decades, microfinance institutions have managed to reach millions of clients and achieved impressive repayment rates.  Indeed, mainstream banks have begun to adopt some of these techniques and to enter some of the same markets.

But has microfinance been able to meet its promise of reducing poverty without requiring continuous subsidies?  While many heartening case studies are cited – from the villages of Thailand to the Peruvian Andes – it is still unclear how big an impact microfinance has had on poverty overall. Despite product and technological improvements, the institutions that serve the poorest still remain grant and subsidy dependent, pointing to a trade-off between profitability and serving the very poor.

Although the attention of microfinance has traditionally focused on the provision of credit for the very poor entrepreneurs, much of micro-credit is used for consumption rather than investment. How credit is used is of paramount concern.  For poor households, credit might not be the only or the priority financial service; good savings, payments (including international remittances) and insurance services may rank higher.  For example, one of the reasons why poor people do not save in financial assets might be the lack of appropriate savings products, with consumption credit being a second-best solution.

Should financial services for the poor be subsidized? Answering this question requires comparing costs and benefits of subsidies in the financial sector with subsidies in other areas such as education or infrastructure.  Compared to credit subsidies, there is likely to be a stronger case for subsidizing payment and savings services, since these are basic services necessary for participation in a modern market economy.

People are sometimes less likely to repay a credit when subsidies are involved.  Because of this, encouraging technological innovation and taking advantage of technological advances, which are becoming more widespread in the era of globalization, may be more promising.