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, Freedom from Hunger conducted 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 (ODE), a non-governmental organization (NGO) that facilitates savings groups (SGs). 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?
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 were 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 as 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.
Read the full report to learn more about what factored into preferred coping mechanisms, and what the authors recommend in designing financial products moving forward.