Microfinancial Services and Risk Management: Evidences from Sri Lanka

Abstract

This paper examines the importance of financial services as risk coping mechanisms in Sri Lanka, while insurance and savings products function as ex-ante, i.e., preventive, strategies for consumption smoothing, credit is typically used as an ex-post risk coping strategy. Based on household survey data, it estimates the determinants of the household¡¯s use of one, two or all three types of microfinancial services and for different combinations of financial services applying ordered probit models. There is empirical evidence that household¡¯s probability to participate in microfinancial services increases with rising self perception towards risk. Further, it depends highly on the type of risk, if a household is more or less likely to use microfinancial services, whereas the accessibility to one, two or three microfinancial services are related to the experience of specific hazards in the past. In confirmation with earlier findings, the poor are less likely to use microfinancial services than their better-off counterparts.