Flexible financial products in microfinance to address risk

 Of the approximately 1 billion people in world who live on less than $1 per-day, most live in rural areas and are dependent on agricultural or pastoral production systems. While higher yielding production technologies are a necessary part of the solution to their poverty, more production, most of the time will not be sufficient to solve the problem of low rural living standards. The reason, as analysts and policymakers alike have long recognized, is that risks and uncertainties associated with improved technologies can discourage their adoption, making people trapped in poverty. In addition, risk and uncertainties can further distort and discourage savings and investment patterns by poor people, making it difficult for them to escape poverty. With growing evidence that climate change is further destabilizing climates, production and consumption risk as a development problem is increasing in magnitude.

Two main types of financial products have been developing for poor rural households to cope with risk: •  novel insurance products that can transfer risk out of rural production systems , especially for events that affect large numbers of people such as weather shocks. Thus, poor households are able to safely take advantage of improved technological and investment opportunities. However, while many of these products are promising, and evidence is beginning to build that they can be effective, some technical problems block the expansion of these efforts.

• considerable progress has been made in adapting microfinance savings and credit facilities to the needs of the poor, but generally not for the purpose of helping them deal with uninsured risks.
The hypothesis underlying this FERDI meeting was that savings and credit products can be adapted to make them effective in providing protection against some types of risks in the context of microfinance. Formal precautionary savings instruments can be designed to both give incentives to save and to provide agile access to accumulated savings when adversity strikes. Flexible credit instruments can also be designed that provide insurance substitutes and yet maintain clients’ discipline in enforcing loan repayment. For instance in several developed countries, pre-approved flexible credit lines are currently in place for catastrophic risks at the country level, and also at the firm level in the formal sector, as well as at the individual level in the form of credit cards, credit lines, and payday loans for trusted clients.
The purpose of the meeting consequently aimed at bringing together a group of experienced practitioners in the insurance, microcredit and microsavings markets, to debate on the state of the art in practice and to brainstorm on possible innovative ideas and product related to: 1) Microinsurance and microcredit contracts: facing data issues and rethinking the role of the public sector in these markets

2) New flexible financial products: combining saving, credit and insurance.
Speakers:   Michael Carter, University of California at Davis and director Basis/I4 Project; Vianney Dequiedt, Cerdi-CNRS ; Patrick Guillaumont, Université d’Auvergne et Président Ferdi ; Catherine Guirkinger, Université de Namur ; Lena Heron, USAID and the Global Action Network on Agricultural Index Insurance; Mahabub Hossain, BRAC; Alain de Janvry, University of California at Berkeley and Ferdi; Carolina Laureti, CERMI; Adrian Merryman, Vision Fund Tanzania; Marc Sadler, World Bank; Alexander Sarris, University of Athens and FERDI.