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Special project: Financial institutions

The role of financial institutions in absorbing shocks and reducing vulnerability: Evidence for households and small enterprises in rural Thailand and Vietnam

Rainer Klump, Dr. rer. pol. (Prof., Goethe University Frankfurt/Main, Department of Economics)

Lukas Menkhoff, Dr.rer.pol. (Prof., Leibniz Universität Hannover, Department of Economics)

Summary

Financial institutions can play a very useful role in dealing with risks that lead to poverty. To investigate the role of financial institutions as a component of market-based social risk management in emerging economies, there is a need to conduct a broad survey-based study that addresses three issues: households’ financial decision making, risk factors of households and finally – based on these two modules – financial strategies to deal with vulnerability to poverty. The contribution of this project is fourfold: (1) go beyond most impact analyses of financial deepening by focusing on the most elementary problem of rural people, i.e. vulnerability to poverty; (2) aim for a complete picture of financial relationships by explicitly including the situation of informal and formal institutions, which both play an important role (even more so in Thailand); (3) analyze the risk situation of households by allowing for a subjective risk perception as advised by recent behavioral economics and by considering complements and substitutes for financial risk diversification; and (4) extend earlier approaches to a strictly comparable two-country study) in order to better identify generally relevant and institution-specific factors. This project is a step in building up a most useful panel data set, which will help to better grasp the time and causality dimensions.