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

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Jan 2008
India, January, 08 2008 - Instability and unpredictability faced by low-income households increase their vulnerability making poverty even more unbearable. Self-Help Group (SHG) program, which is the largest and fastest growing microfinance program in the developing world, has been aggressively promoted as a way of combating poverty. The paper investigates whether SHG participation does result in declining poverty and vulnerability.

A theoretical framework examines the mechanism through which the pecuniary and non-pecuniary effects of SHG program influence the household’s ability to manage risk. Going beyond the traditional poverty estimates, the authors use a vulnerability measure which quantifies the welfare loss associated with poverty as well as different types of uncertainty sources, like aggregate and idiosyncratic risk. Applying this measure to a panel dataset from India, they find that SHG members have lower vulnerability as compared to a group of non-SHG (control) members. Furthermore, they also find that poverty contributes to about 80 percent of the vulnerability faced by the household followed by aggregate risk. Dr Ranjula Bali Swain and Dr Maria Floro are the authors of this paper.

 

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