Rethinking poverty, household finance, and microfinance

Jonathan Morduch

Chapter 2 in Handbook of Microfinance, Financial Inclusion and Development, 2023, pp 21-40 from Edward Elgar Publishing

Abstract: High-frequency data show that the material condition of poverty is created by the interaction of insufficiency _ instability _ illiquidity. Reducing instability and/or illiquidity can thus reduce exposure to poverty even when average earning power (overall insufficiency) is unchanged. The high-frequency view shows competing needs for smoothing and spiking of spending, alongside competing needs for structure and flexibility in financial products. High-frequency instability also explains why ex post moral hazard (“strategic” default) is a particular problem for lenders and, in turn, why joint liability is difficult to sustain in microfinance. The high-frequency repayment structure of typical microfinance loan contracts is similar to the installment structure of consumer lending products and contractual saving products, explaining how microfinance loans work naturally for purposes other than business investment, despite lenders’ nominal intentions. The high- frequency view helps to show why microfinance loans remain popular despite mixed evidence on average impacts on household income.

Keywords: Development Studies; Economics and Finance (search for similar items in EconPapers)
Date: 2023
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