Too Vulnerable for Microfinance? Risk and Vulnerability as Determinants of Microfinance Selection in Lima

Abstract

Despite dramatic microfinance growth, formal credit use by poor households remains low. There is increasing evidence of muted demand, suggesting a link between the risk of projects financed by credit and households' risk management. This article analyses these links using panel data on urban microentrepreneurs in Lima, based on a model in which the risk of projects and the ability to manage risk determine if a household seeks microfinance. Controlling for unobservable traits like risk aversion and skill, results suggest that more vulnerable entrepreneurs are significantly less likely to use microfinance than their less vulnerable counterparts.