Theme Four Wrap Up: More Household Savings & Better Consumption Smoothing?

by Lynne Davidson Jarrell

Lynne has graciously volunteered to summarize the posts under Theme Four, from her perspective rather than mine. Note that she points to the posts relevant to each topic she covers (the numbers are hyperlinks). Each post on this blog is assigned a unique number in chronological order of posting, and all the posts for each theme are listed by number and title on the right side of this page under “View by Theme.” Next week I will discuss what Theme Four means for Freedom from Hunger. Then on to Theme Five!

In theme four, we set aside the idea that microfinance will systematically lift participants out of poverty and instead look for evidence that microfinance, in its various forms, increases “resilience” for participants. That is, we might say that microfinance is doing its job to help poor households weather the storm of poverty if we can show that it makes it possible to cover unexpected or financially “stressful” costs when they arise or to become more food-secure during otherwise difficult times.

A summary of Theme Four is best split into two main parts.

Evidence for income-smoothing and asset-building

Microfinance might contribute to increased resilience by improving income-smoothing for participating households. Income-smoothing (almost by definition) means fewer dips in the income required to pay for necessities (like food) and unexpected costs. While we can’t exactly equate income-smoothing with alleviation of the stresses of poverty (one may need to spend the income in order to feel the relief), evidence for income-smoothing would be comforting for  those who are looking for that decreased vulnerability. There are two general processes through which microfinance might contribute to income-smoothing: by increasing the diversity of income sources and by increasing the participation of household members in income-generating activities (IGAs) (post 37). We find evidence that microfinance (especially loans) is associated with those two processes. But the evidence that the increased diversity of income sources or the increased participation in IGAs results in better income-smoothing is severely lacking. One possible exception is a study of commitment savings accounts in Kenya that shows that the household income of participants did not drop as much as a control group during periods of illness – sounds like a bit of income-smoothing.

Chris offers several possible explanations for this dearth of evidence (post 37). The important summary point is that the evidence is almost non-existent.

Microfinance might contribute to increased resilience to the financial crises of poverty by helping participating households build assets. Like income-smoothing, building assets isn’t exactly synonymous with making life more comfortable for poor households; I can imagine a family building assets but being afraid to use those assets even when they most need them, because they are generally more worried about the future than the present. However, evidence for asset-building would be a positive sign to those who are looking for decreased vulnerability, as such assets are insurance against a future need for cash.

    • There is some evidence for an increase in productive physical assets (that is, income-generating assets) by microfinance participants. A review of ten impact studies found evidence that microfinance loans meant the building of productive assets; the greater the value of the loans, the greater the increase in assets (post 38). Another review (this one of randomized controlled trials—RCTs) found increased investment in participants’ businesses in four of five microcredit and two of three microsavings programs (post 38). Research in Burkina Faso, Morocco, and Bolivia found similar asset-building among microfinance participants there.
    • A study of microfinance participants in India found a small increase in other (non-productive) assets (as well as the larger increase in productive assets). A review of studies of savings groups also found asset accumulation, with the purchase of more expensive items associated with those who had been in the program longer (post 38).
    • There is also evidence for asset-accumulation in the form of monetary savings for participants in Bangladesh, Mali, Ghana, Bolivia, Burkina Faso, and Benin (post 41). Of course, we observe greater savings for those in savings groups. For these clients, we need to know if their savings are in addition to or a substitution for savings that would have accrued without the MFI. One RCT in Kenya found that such savings are a real increase (post 41).

Evidence for consumption-smoothing and shock management

If MFI participation allows participants to avoid dips in consumption during the more financially difficult times of their lives, then we have achieved some form of poverty alleviation. Unfortunately, the evidence for such consumption-smoothing is not yet available (post 47).

If MFI participation allows households to better cope with shocks, like food scarcity, job loss, or severe illness, then we have achieved some form of poverty alleviation. A review of the impact stories in ten Freedom from Hunger programs found that a majority of participants who dealt with one or more financial shocks while participating in the program credited that microfinance program helping to manage the shock. Of 12 recent RCTs, at least ten suggest MFI participants are more likely to be able to cope with shocks (or have experienced a form of consumption-smoothing that suggests the ability to cope with shocks) than non-participants (post 49). One extensive study of 2,000 households in Malawi offers a unique body of evidence to show that increased savings had an effect on cash gifts and cash loans within those communities during the “pre-harvest hungry season,” especially for the most vulnerable households (post 51), suggesting shock-coping behavior for those households.

In sum, the evidence supporting microfinance as a successful tool for poverty alleviation (as opposed to poverty reduction) can be seen in studies that show that MFI participation helps with asset-building and with shock management.