Access to Finance Innovations March 5, 2010 Financial Innovations Marketplace

Access to Finance InnovationsMarch 5, 2010

Financial Innovations Marketplace

Session Objectives

• Issues in access to finance from a household/demand perspective

• Provider sustainability and risk management

Goals of finance

1.Smooth consumption over time

2. Smooth consumption across uncertain states of the world

Household Risk Management (demand side)

Household

Farm (price & weather)

Health (routine & catastrophic)

Accident/ deathLongevity

Macro (inflation, gold

price)

Feizal, Uttar Pradesh, India (Portfolios of the Poor, Morduch et al)Household monthly income: $36

Broke his leg, no insurance

Delayed treatment

Lost 8 months of wages

Total treatment cost: $250

Son’s wage advance

Savings RelativesCredit

Product Design - a Priority

• Cashflow matched loans• Loans with bundled risk management• Savings with commitment features• Insurance combined with annuities

Role of providers/intermediaries

• Last mile between large Financial Institutions/markets and customers– MFIs, credit unions, cooperative banks, Local

Area Banks• Tend to have low levels of capitalisation• Risk management crucial for sustainability

Provider Risk Management (supply side)

• Product design• Diversification• Pricing/capital

Idiosyncratic risks

• Securitisation• Reinsurance• Derivatives

Systematic risks

Challenges in Risk Transfer

• Moral hazard on the part of the RFI• Appropriate pricing of risk• Finding relevant buyers for this risk

Thank you

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