Households in developing countries are subject to numerous risks such as crop losses, business failures, unemployment and illnesses. Yet, credit and insurance markets are often very incomplete or missing and households rely instead on informal tools and institutions to share risk. To the extent that such informal insurance mechanisms are not perfect, risk can have important consequences for household wellbeing, both in the short and long run.
Research on insurance and risk has focused on understanding the effectiveness of the informal tools and institutions employed by households in protecting them against risk and on identifying how risk affects investments in human capital. Research has also analysed the role played by market imperfections such as limited enforcement (when households do not have recourse to formal institutions to enforce informal arrangements) in limiting informal risk sharing. Ongoing work is investigating the role of social networks and their features in shaping informal insurance and how policy interventions interact with existing informal risk sharing arrangements.
Microcredit is typically defined as the provision of small loans to impoverished borrowers who lack access to formal financial services, mainly due to lack of collateral, steady employment and/or a verifiable credit history. Its main aim is to support entrepreneurship and alleviate poverty; it also aims in many cases to empower women, and to help households finance investments in non-productive goods such as safe sanitation. While a number of recent studies confirm, for various settings, that microcredit may stimulate business creation, its impact on borrowers and their households, and its ability to alleviate poverty, remains ambiguous and is the subject of intense debate. Researchers at the IFS add to these discussions with rigorous evaluation studies on how microcredit for productive and non-productive investments affects the well-being of the poor, as well as studying its effects on the lending institutions.