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

  • Ranjula Bali Swain
  • Maria Floro

Uncertainty and unpredictability faced by low-income households increase their vulnerability making poverty even more unbearable. India’s National Bank for Agriculture and Rural Development (NABARD)-initiated Self-Help Group (SHG) program, which is currently the largest and fastest growing microfinance program in the developing world, has been aggressively promoted as a way of combating poverty. This paper investigates whether or not SHG participation results in reducing poverty and vulnerability. A theoretical framework is developed 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. Going beyond the traditional poverty estimates, we use a vulnerability measure which quantifies the welfare loss associated with poverty as well as different types of risks like aggregate and idiosyncratic risks. Applying this measure to an Indian panel survey data for 2000 and 2003, we find that SHG members have lower vulnerability as compared to a group of non-SHG (control) members. Furthermore, we find that the poverty contributes to about 80 percent of the vulnerability faced by the household followed by aggregate risk.

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File URL: http://w.american.edu/cas/economics/repec/amu/workingpapers/2008-02.pdf
File Function: First version, 2008
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Paper provided by American University, Department of Economics in its series Working Papers with number 2008-02.

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Length: 36 pages
Date of creation: Feb 2008
Date of revision:
Handle: RePEc:amu:wpaper:0208
Contact details of provider: Web page: http://www.american.edu/cas/economics/

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  1. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, vol. 37(3), pages 353-60, July.
  2. Robert M. Townsend, 1995. "Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 83-102, Summer.
  3. Mark M. Pitt & Shahidur R. Khandker, 1998. "The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 958-996, October.
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