Adverse Shocks and Social Protection in Africa

What Role for Formal and Informal Financial Istitutions?

Background paper to the ERD2009

Author

Abena D. ODURO – Department of Economics, University of Ghana, Legon

Workshop/conference

Paper prepared for the Conference on “Financial markets, adverse shocks and policy responses in fragile countries”, organised by the European Report of Development in Accra, Ghana, 21-23 May, 2009.

Abstract

This paper presents evidence on the wide range of adverse shocks reported by African households. The current financial and economic crisis adds another layer of risk to already vulnerable households and firms. In responding to an adverse shock, households are involved in a balancing act that is aimed at maintaining consumption and/or assets above critical levels. Households mainly use coping mechanisms that depend on family and other networks and self-insurance. There is limited recourse to public social protection and formal credit and insurance markets. The paper examines some informal financial arrangements. Some of these are not designed to smooth consumption when there is an adverse shock. These informal mechanisms have the potential to be the platform to expand access and utilisation of formal finance particularly in rural communities. There is a clear role for publicly provided interventions. This is because informal risk sharing mechanisms do not cover all shocks. The premium paid may not be adequate to cover the entire financial implications of the shock. Finally, the design of the risk-sharing institutions can result in the very poor being excluded.

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