How Do Financial Services Help the Poor?

People living in poverty need a diverse range of financial services to run their businesses, build assets, stabilize consumption, and shield themselves against poverty. Microfinance can help lessen poverty, although this can take time.

Household income

Financial services can improve poor people’s lives by providing needed financing for business activities, which can increase their household incomes. By offering a variety of financial products such as savings, insurance, loans, and remittances, microfinance empowers poor people to diversify their income sources, meet basic needs and cope with shocks to their income. .While increased earnings are by no means automatic, reliable sources of credit provide a fundamental basis for planning and expanding business activities, which can enable clients to save, manage cash flows, and reduce the need to sell assets to in times of crisis.

Asset building

Due to increased income, and the ability to save and take on credit, microfinance can provide the means for poor people to acquire land, construct or improve their home, purchase animals and consumer durables, or create or expand their businesses. Studies have shown that clients who take part in microfinance acquire more productive assets over time than those who do not.

Reducing vulnerability

By reducing vulnerability and increasing earnings and savings, financial services allow poor households to make the transformation from every-day survival to planning for the future. Households are able to send more children to school for longer periods and to make greater investments in their children's education. Increased earnings can lead to better nutrition and better living conditions, which translates into a lower incidence of illness. Increased earnings and access to microinsurance also mean that clients may seek out and pay for health care services when needed, rather than go without or wait until their health seriously deteriorates.

Empowering women

Many microfinance programs target poor women. For women, money management, greater control over resources, and access to knowledge leads to more choices and a voice in family and community matters. Economic empowerment is accompanied by growth in self-esteem, self-confidence, and new opportunities. Many qualitative and quantitative studies have documented how access to financial services has improved the status of women within the family and the community. Women often become more assertive and confident. In regions where women's mobility is strictly regulated, women have often become more visible and are better able to negotiate the public sphere. Women involved in microfinance may also own assets, including land and housing, and play a stronger role in decision making. In some programs that have been active over many years, there are even reports of declining levels of violence against women.

In conclusion, access to financial services creates the possibility of improving the economic conditions of the poor. However, we should not lose sight of the fact that credit, or debt, is a big responsibility. Incidences of over-indebtedness do occur and clients may end up less well-off, reminding all of us that microfinance, in particular credit, must be used judiciously.