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Microcredit and micro-insurance, considered within the larger microfinance current, are two risk management tools currently being developed by governments and international development agencies to reduce vulnerability associated with poverty in rural areas. Discussions about credit protection increasingly invoke the need to create linkages with insurance services that are tailored to the risks rural people in developing countries face. Once a country’s financial and banking sectors have been developed, the pairing of these two instruments could do one of two things. It may present a veritable opportunity to emerge from the vicious cycle of poverty, or it may introduce an additional risk factor for the financial institutions that have developed this combination or the beneficiaries could risk becoming trapped in the new dynamics of excessive debt. 

Based on experiences involving risk management in two countries, India, the champion of microfinance and Madagascar, whose banking sector is still very limited, this policy brief will venture to propose the arguments necessary in illustrating our point. Finally, we will demonstrate several risk transfer strategies, each differing according to the development level of the banking sector of the countries in question, which can serve as complementary elements to microcredit as a risk management tool. 

This paper is part of the FAO Policy series: EASYPol-Resources for policy making (in agriculture, rural development and food security). To find other EASYPol series' resources, go to the Policy Support and Governance website>Resources and type "EASYPol" in the free text search.