Session 9 Micro Savings and Micro Insurance Micro

Session 9: Micro Savings and Micro Insurance Micro Credit and Savings • It was an implicit phenomenon • Any MF programme starts with inculcating savings behavior • Consumption smoothening can be achieved by making low assets through this behavior • Why we need micro savings? • Answer: There is imperfect way to do it

Session 9: Micro Savings and Micro Insurance Puzzle I • Why ROSCAs exist for a long time? • Why is it popular? • Why this structure does not break quickly?

Session 9: Micro Savings and Micro Insurance Puzzle II • Why is credit considered in the first place? • Does the existence of credit rationing thus stem from a more fundamental constraint in the ability to save? • Are poor households too impatient to save? Do they require a different “savings technology”?

Session 9: Micro Savings and Micro Insurance Debate about Savings • Savings is the tool to build up assets • It also brings discipline in the financial aspect of life • Banks or MFIs consider savings as a security of loanable funds • So savings though is embedded in the microfinance programme, credit gets more importance.

Session 9: Micro Savings and Micro Insurance Benefits of savings • Households can build up assets to use as collateral. • they can also better smooth seasonal consumption needs, finance major expenditures - school fees, -self-insure against major shocks, and -self-finance investments.

Session 9: Micro Savings and Micro Insurance Types of Savings • Low Frequency Savings -Life cycle hypothesis is not applicable to developing nations -intergenerational hh exists -there is continuous pattern of HH constitution -Grameen Bank Pension scheme-example -stable inflation benefits the customers

Session 9: Micro Savings and Micro Insurance • High Frequency Savings -Permanent Income Hypothesis, Friedman(1950) –Permanent and Transitory Income -for short term investments It is difficult to decide how much save and how much consume? For smoothening consumption, Marginal Utility of t period would be equal to expected utility of the next period =>MU t = ( 1 + r )/ ( 1 + d ) E t [ MU t + 1 ] , This applies when market is perfect.

Session 9: Micro Savings and Micro Insurance • If there is a restriction on Savings and borrowing, =>MU t = ( 1 + r ) /( 1 + d ) E t [ MU t + 1 ] + λ t + 1 , λ t + 1=how much consumption choices depart from the optimum choices

Session 9: Micro Savings and Micro Insurance • For poor households initial income and consumption growth is negatively correlated so λ t + 1 <0 => borrowing constraints and for the rich it does not matter so λ t + 1=0+> no constraint.