The Role of Savings and Credit in Coping with Idiosyncratic Household Shocks

This study examines the effect of access to formal banking services on households’ ability to smooth consumption in response to illness of adult workers. The institutional peculiarities of Indonesia’s largest commercial bank are exploited to separately estimate the effects of access to formal credit from savings. The means by which households smooth consumption differs depending on their access to formal services. Those with access to formal credit increase borrowing from banks, while those with access only to formal savings, but not credit, draw down on savings. Households without access to formal banking services end up liquidating productive assets.