ABSTRACT
An important dimension of financial services is the provision of insurance. Microfinance institutions are institutional innovations that help provide access to financial services for the poor. This chapter analyzes the generic-lending problem and explains how commercial banks respond and why poor people are excluded from formal financial institutions. When there are markets failures, interlinkages between two transactions often allow each transaction to perform better than it would alone. A value chain is the sequence of transactions that run from accessing inputs, to the production, processing, marketing, and consumption of a particular commodity. Informal institutions such as savings clubs and rotating savings and credit associations are based on trust, but are not immune from the defaults of members who collected other members’ savings. The chapter concludes with recent institutional innovations to expand financial services for the poor such as index-based insurance, cell phone banking, and digital credit.
