Managing financial risks at household level: empirical evidence from Faisalabad, Pakistan

Abstract

The financial risks and uncertainties undermine the capabilities of households to evade poverty traps. These uncertainties and risks cause income fluctuations and may have consequences on their livelihoods and welfare status. The households must recognize and manage these risks and uncertainties to guarantee smooth consumption at the household level. This study used a dataset of 130 households collected through face-to-face interviews from the district of Faisalabad of Punjab province in Pakistan. A logit model was employed to assess the impact of various socio-economic attributes, respondents’ risk perceptions and risk attitudes on their decisions to adopt financial risk management tools at the household level. The results revealed that the socio-economic attributes including age, education and income of the sampled households significantly influenced the decisions to adopt both the ex-ante and ex-post risk coping strategies to manage financial risks. The findings also highlighted the role of respondents’ perceptions associated with loss in business and illness of the primary breadwinner that affected respondents’ decisions to adopt risk management strategies in dealing with financial risks at the household level. The study recommends that the government and NGOs should educate the residents on how to safeguard themselves from financial risks by enabling them to use the available risk management tools more effectively.