An increasing body of evidence shows that appropriate financial services can help improve individual and household welfare and spur small enterprise activity. Different types of financial products can benefit poor people in different ways.
- Credit: Microcredit helps encourage investments into assets that enable business owners to start or expand small enterprises. In many countries, it’s been demonstrated that access to credit can lead to larger and more profitable businesses. For example, with access to credit, farmers can invest in larger quantities or more diverse livestock; the owner of a market stall can purchase more wares to sell; an artisan can acquire more raw materials.
- Savings: Building savings helps households manage cash flow spikes and smooth consumption, as well as build working capital.
- Insurance: Vulnerability to risk and the lack of instruments to cope with external shocks make it difficult for poor people to escape poverty. Microinsurance can be an important instrument for mitigating risk. Weather-based index insurance helps farmers by giving them the confidence to try riskier cash crops, buy fertilizer, or hire labor, for instance. With index insurance, farmers are less vulnerable in the face of drought or natural disaster.
- Payments and mobile money: Having an efficient way of making payments reduces households’ transaction costs. Rather than travel long distances, people have the ease of doing business on their mobile phones.
Research also shows that more inclusive financial markets are directly linked with economic growth and employment. Additionally, policymakers increasingly recognize that a financial market that reaches all citizens allows for more effective execution of other social policies and development priorities.