Access to Finance: Chapter 2, Handbook of Development Economics, Volume 5

June 2009
Dani Rodrik and Mark Rosenzweig, eds. 
By Dean Karlan and Jonathan Morduch 

Access to Finance: Chapter 2, Handbook of Development Economics, Volume 5
Expanding access to financial services holds the promise to help reduce poverty and spur economic development. But, as a practical matter, commercial banks have faced challenges expanding access to poor and low-income households in developing economies, and nonprofits have had limited reach. We review recent innovations that are improving the quantity and quality of financial access. They are taking possibilities well beyond early models centered on providing “microcredit” for small business investment. We focus on new credit mechanisms and devices that help households manage cash flows, save, and cope with risk. Our eye is on contract designs, product innovations, regulatory policy, and ultimately economic and social impacts. We relate the innovations and empirical evidence to theoretical ideas, drawing links in particular to new work in behavioral economics and to randomized evaluation methods.