Microfinance: Building the Capacities of the Poor to Participate in the Larger Economy

This paper traces the relationships between the provision of financial services to the poor and their ability to participate in the larger economy. Poor households progress from a stage of securing themselves from the daily risks they face, to establishing and enhancing their livelihoods. The paper outlines the role of microfinancial services in enabling mobility along this continuum.

Section I introduces the concept of the larger economy.

• Capacities of the poor have to be built with a view to enabling their participation in this larger economy. Such participation entails the abilities to maximise returns on factors of production and manage risks through reduced vulnerability;
• The ability to maximize returns as abilities to engage in an enterprise, obtain secure wage employment, maximise return on surplus and access competitive technologies and markets.

Section II explores the concept of vulnerability and its implications on participation in the larger economy.

• Vulnerability is traced to exposure to various kinds of risks;
• Various typologies of risk are examined;
• The coping mechanisms used by the poor to deal with these risks, broadly classified into ex ante and ex post, are also analyzed.

Section III examines the limitations of informal coping mechanisms in reducing vulnerability. Sections IV and V draw upon the limitations of informal mechanisms as examined in section III to build a case for reliable and adequate financial services that can address the risk- mitigating and growth- seeking needs of the poor.

Section VI concludes by attempting a definition of Micro-Financial Services that spans vulnerability as well as growth aspects.

[Adapted from the author]