Risk-Sharing Finance and the Role of Public Policy

Analysts suggest that sound public policy and strengthened institutional framework in developing countries can go a long way to reducing risk. Examples of policy improvements include better governance to reduce damage from household mismanagement and policies to achieve and sustain economic and political stability and encourage the development of the financial sector. In terms of institutional framework, clear and secure property rights, contract enforcement, trust among people and between the government and people, as well as other institutions, can reduce risk, uncertainty, and ambiguity, strengthen social solidarity, bring private and public interests into closer harmony, and ensure coordination to achieve risk sharing (Mirakhor, 2009, 2010; North, 2005). Public policy could also help to mobilize the savings of poor households, and thus reduce vulnerability to income shocks. The policies of Bank Rakyin Indonesia, the Safe Save Program implemented among poor households in the slums of Dhaka in Bangladesh, and microfinance programs in Asia, Africa, and Latin America are all sighted as successful programs that have mobilized savings among poor households (Morduch, 1999; Rutherford, 1999). Bencivenga and Smith (1991) suggest a strong relationship between deposit mobilization, efficiency enhancement, and economic growth. Public policies to forge integration and support savings mobilization in developing countries reduce risk and build resilience to shocks.