Financial services to enhance resilience

Low-income households often work in the informal economy and are more vulnerable to risks than the rest of the population. Yet, they are the least able to cope when crises occur. Access to financial services can improve their resilience and provide them with better coping mechanisms to mitigate and better manage the impact of risks.

Insurance is the financial service most associated with risk and resilience. It is particularly effective to manage risks resulting in large financial losses that occur infrequently.

For smaller and regular expenses, low-income households typically rely on assistance from family and friends or on loans from moneylenders. The former comes with reciprocal obligations, while the latter can be expensive. These coping strategies reflect a market failure, because financial institutions are not providing a relevant service, such as an emergency loan, that could be used by vulnerable households to manage risks more effectively.

Perhaps even more important is the availability of savings facilities that allow the working poor to set aside funds for a rainy day. While it is tempting to assume that low-income households are too poor to save, most of them do save, but often not in cash. Instead, they save in-kind, through for example livestock or jewellery. These options are useful, as they tend to retain their value during inflationary periods, but they are also vulnerable to theft. Diversifying savings options, in-kind and in an account, provides better security.

Social finance work on this topic

Integrated risk management
One of the primary risks facing low-income households is illness and financial intuitions can tailor their offerings specifically to this risk, as illustrated in this paper. It is also useful to consider how combining savings, emergency loans and insurance into an integrated solution can be more effective and attractive for households. Our collaboration with FSPs in Asia to test integrated risk management solutions illustrates this approach.

Financial education
To use these services, both separately and collectively, low-income households need to understand how to access and use them and to develop the financial discipline to regularly set aside funds in a saving account. Effective financial education is as important in resolving the market failure as encouraging banks, credit unions and microfinance institutions to provide financial services that enhance resilience.

Capacity building forms an integral part of many of the ILO’s projects and activities. Our financial education programme for example has a long history of face-to-face interactions through trainings and technical support activities.