The Role of Financial Services in Building Household Resilience
The primary theory of change for the microfinance industry has historically been one in which access to and use of formal financial services reduces household poverty. Newer theories of change suggest that the use of financial services for poor households results in resiliency. In effect, financial services help households anticipate, adapt to, and/or recover from the effects of shocks in a manner that protects their livelihoods, reduces chronic vulnerability, and facilitates growth.
To fill some of the gaps in knowledge about how financial services contribute to household resilience, CGAP engaged Freedom from Hunger to conduct a research project with two of its partners in rural Burkina Faso: le Réseau des Caisses Populaires du Burkina Faso (RCPB), a credit union that provides formal financial services, and the Office de Développement des Églises Évangéliques, a nongovernmental organization (NGO) that facilitates savings groups. The research agenda was designed to answer two research questions:
- What strategies do poor households employ to manage economic, environmental, and health shocks that disrupt their financial lives?
- What roles do formal, nonformal, and informal financial products play in improving household resiliency and building assets?
Four research methods were used to answer these questions: (1) a formative research exercise conducted with both men and women, (2) 10 “resilience” diary surveys with 46 women over a seven-month period, (3) an economic game conducted with 400 women, and (4) a wrapup qualitative assessment including focus groups and key informant interviews with partner staff.
The research revealed that the most common shocks households faced, in descending order, were illness/injury, death of family members, livestock loss, and poor harvest. To cope with these shocks, households primarily relied on savings held at home, reduced their food consumption, and sold grain and livestock. Borrowing from financial institutions, family, and friends was less preferred. Households frequently used negative coping mechanisms, such as reducing food consumption and selling grain, which would likely result in long-term negative developmental consequences.
The preferred coping mechanisms were different from the ones frequently used: selling small livestock ranked first, followed by borrowing from a savings group, reducing food consumption, using savings, borrowing from family and friends, and selling grain. Purchasing on credit was not a preferred method for coping with any of the shocks.
The two most important factors that determined whether a mechanism was used to cope with shocks were its availability and timeliness. Did the resource or mechanism exist and how quickly could it be accessed? The following features were mentioned but were considered relatively less important: reliability, effectiveness, preventing a family from being worse off (avoiding aggravated food insecurity, the early sale of livestock, or acquiring unmanageable debt), preserving family honor and privacy, and flexibility. Informal financial services played a larger role than formal services in helping households cope with shocks.
Overall, the demand for financial services to anticipate and cope with shocks appears widely unmet. For financial services to help the poor build resilience, they need to be designed to provide vulnerable households with more viable options. The research yielded the following recommendations for designing products and services aimed at improving resiliency:
- Design financial products with features that matter most for coping with shocks: timeliness of payout and availability of the product.
- For a very food insecure population, design and offer financial products with the goal of the population consuming more and better food. Food security should be an explicit, not an implicit, goal of any product designed to improve resiliency.
- Incorporate a gender analysis in market research that allows women to speak freely about the challenges they encounter with all current and potential products.
- Develop more products and mechanisms that help households increase their savings. Savings, for this population, was the preferred coping mechanism and most used (whether in the form of livestock or cash) to anticipate and respond to shocks.
- Develop financial products designed to address specific shocks (not all shocks are considered equal). Shock-specific products, such as health savings and loan products could help the poor build resilience to shocks and reduce long-term costs.
- For highly food-insecure contexts, financial service providers (FSPs) may need to partner with NGOs, such as those offering ultra-poor programs or other support programs (such as health and business and financial education services), to help clients make effective use of financial services.
Financial services can and should play a role in helping women and their households build resilience. But building resilience should be treated as an intentional goal. This may require a shift in focus for some FSPs. Clients need financial and nonfinancial services that help them mitigate risk, lessen the severity of trade-offs, and avoid long-term adverse developmental consequences. Recommendations from this study can be applied to financial service design in a way that increases access and use of financial services for the poor while also making business sense for providers.