Impact of Microfinance on Investment Decision and Consumption Smoothing: A Theoretical Approach

Impact of Microfinance on Investment Decision and Consumption Smoothing: A Theoretical Approach

Arundhati Mukherjee, Ramesh Chandra Das
Copyright: © 2018 |Pages: 13
DOI: 10.4018/978-1-5225-5213-0.ch003
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Abstract

Microfinance has emerged as a powerful tool for poverty alleviation in developing countries. The main objective of microfinance is to provide a cost-effective mechanism for providing financial service to the poor. This chapter attempts to highlight the effect of credit constraints on the productive investment decision of poor households and scope of microfinance in this respect. This chapter promotes the role of microfinance services in consumption smoothing and thus highlights the effect on investment decision of rural poor farming households. As an insured household is motivated to allocate a greater part of its resources away from consumption and saving in favor of investments, this chapter emphasizes the importance of insurance service in product basket of microfinance services.
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Section I: Credit Market Constraint And Resource Allocation

In developing countries poor rural households are exposed to credit market imperfection and constraints. Credit constraints has impact both on long term investment such as farm’s fixed asset (Carter & Olinto, 2003) and on short term profitability (Felder et.al 1990, Foltz, 2004) and therefore, credit market constraints have multiple implication in terms of efficiency and equity. Credit market failures can give rise to heterogeneous resource allocation across households with varying endowments of productive assets. A credit constrained household invests less relatively to a credit unconstrained household and this leads to inefficient resource allocation by the poor households.

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