Credit in times of crisis: Understanding the protective health effects of microfinance during the Indonesian Financial Crisis

Background: Microfinance has been shown to play a vital role in household consumption behavior, which in turn can have a profound effect on health. This paper seeks to examine this relationship in the context of the Indonesian Financial Crisis (c 1997-1999).

Methods: Indonesian Family Life Survey (IFLS) data from 1997 and 2000 are used to capture periods before and after the financial crisis. Instrumental variable least squares (IVLS) regression is utilized to determine causality. The instrumental variable is distance from household to microfinance institution. The change in ln(PCE) between years is used as the dependent variable and represents household consumption smoothing (a negative coefficient implies increased consumption smoothing).

Results: From 1997 to 2000, total per capita expenditure (PCE) decreased 18%, medical PCE decreased 4.24%, food PCE decreased .79%, and education PCE decreased 11.55%. Households which participated in microfinance smoothed overall PCE by -3.533 (p<.05), food PCE by -1.98 (p<.10), and education PCE by -4.47 (p<.01). Microfinance participation smoothed medical PCE by -2.28, but the relation was statistically insignificant (p=.53).

Conclusions: We learn that microfinance was able to assist households in smoothing education and food expenditures. Given the importance of food and education to health, microfinance can act as a crucial safety net during times of crisis, preventing adverse health and social outcomes. The lack of a significant effect of microfinance on medical consumption smoothing may suggest that in times of crisis, households are willing to defer medical costs in favor of more immediate needs such as food and education.