This paper presents a new methodological framework for measuring the level of household access to credit. It provides an analytical framework for examining the determinants of household credit limits and derives implications on information needed to examine the extent to which households are credit constrained. Empirical application of this method involves directly eliciting credit limit information in household surveys. Illustrations are provided using data from Bangladesh and Malawi.

DC, he oversees Calmeadow’s various research initiatives as well as its renowned Resource Center. Prior to joining Calmeadow, Mr. Churchill was the Coordinator of the MicroFinance Network, a global association of leading microfinance practitioners. His microfinance experience also includes working for Get Ahead Financial Services in South Africa and ACCION International. He has authored several publications, including Client-Focused Lending: The Art of Individual Microlending

The paper departs from the standard practice that takes the estimated marginal effects of either the amount of credit received or membership in a credit program as measures of the impact of access to credit on household welfare. The marginal effects of the formal credit limit variable on household welfare, controlling for the credit limit from informal sources as well as the credit demanded from both sources, measure the marginal effects of access to formal credit. The main finding of the paper is that access to formal credit, by enabling households to reduce their borrowing from informal sources, has marginally beneficial effects on household annual income. However, these effects are very small and do not cause any significant difference between the per capita incomes, food security, and nutritional status of credit program members and noncurrent members. Moreover, the beneficial substitution effect reflects only the fact that reduced borrowing from informal sources makes informal loans play a lesser role in the negative impact that borrowing (from formal or informal sources) has on net crop incomes. The marginal effects on household farm and nonfarm incomes resulting from mere access to formal credit (without necessarily borrowing) are positive and quite sizable, but not statistically significant. Land scarcity and unfavorable terms of trade for the smallholders' farm products remain by far the factors that most constrain per capita household income growth in Malawi. The paper concludes that the necessary complementary resources and economic environment are not yet in place for access to formal credit to realize its full benefits for Malawi's rural population. CONTENTS Acknowledgments ................................................... viii 1.

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The recent policy debate has emphasized micro-credit, but not micro-finance as one of the tools for poverty alleviation (see for example the Micro-Credit Summit in February 1997 in Washington, D.C). Improved access to credit is seen as a potent means for increasing the poor’s income. The role of credit for consumption smoothing is rarely mentioned in meetings attended by staff from micro-enterprise or agricultural credit institutions, and savings services seem to be promoted simply for the sake of “mobilizing ” capital, disregarding their potential role for smoothing consumption. Except for few micro-finance institutions, the role of insurance for income and consumption smoothing is completely neglected. This paper seeks to assess the role of microfinance for income and consumption smoothing by the poor. In section 2, a conceptual framework is developed that distinguishes between credit, savings and insurance services, and identifies two principal pathways through which access to financial services can enhance income and smooth consumption. I further discuss how the demand for these services is expected to change with increasing level of poverty and risk exposure of the household or individual. In section 3, the types of risks faced by households are presented. I then highlight potential areas for product innovation by the micro-finance sector to address these risks. Section 4 discusses the potential and limits of micro-finance services in assisting households to cope with adverse shocks. This section also provides a non-exhaustive list of examples of innovations already implemented by selected microfinance institutions that seek to address the demand for financial services for smoothing income consumption. Section 5 concludes with policy recommendations for the design and implementation of micro-finance schemes that not only respond to the income and accumulation motive of households but also to their desire to safeguard their consumption of food and other basic needs via measures of income and consumption smoothing.