March 06, 2002
MFIs Expand Services to Include Insurance
By Calvert Foundation
Many Microfinance Insitutions (MFIs) are realizing that low-income populations are in need of a
diverse array of financial products and services. One recent innovation is the concept of MFIs
providing insurance to their low-income borrowers.
As MFIs evolve, they are discovering that loans for entrepreneurs do not cover all of the financial
needs in low-income communities, because although the neighborhood can be made wealthier, their
exposure to risk does not change.
The concept of microinsurance has
emerged as MFIs become more established and financially stable, they are able to identify and suit
the needs and priorities of the low-income populations that their services target. In addition, it
makes sense for the MFI to provide this service, because the same low-income entrepreneurs that
turned to the MFI for financing also have no other affordable options for attaining insurance. The
low-income clientele served by MFIs are highly vulnerable to risk from disease, natural disasters,
violence, and fluctuations in the local economy, and insurance can provide a financial windfall
when people face these problems. However, traditional insurance coverage is almost always too
expensive for low-income populations. Though many MFIs do not yet have the capacity to offer
anything but the most basic coverage, simple affordable insurance against health and economic
emergencies provides for most of the needs of low-income households.
From the perspective
of the MFI, providing microinsurance is not simply a charitable cause. Rather, it also diversifies
the line of financial products that the institution can offer and can ensure profitability. There
are many advantages for MFIs providing inexpensive insurance to their clients. First, since a
trusting relationship has already been established, the MFI is the most likely source for a
low-income entrepreneur to go for any financial service, so any sort of affordable insurance
product would be directly accessible and marketable to the client. Second, coverage of capital
would cause a decrease in loan defaults due to disasters. If the MFI directly provides the
insurance then the coverage would come from a separate income source, and if the insurance is
provided through a partnership then the MFI will benefit even more from the drastic decrease of
defaults. Third, although this is not popularly practiced, if the MFI provides insurance directly
it is an additional source of revenue (which could in turn increase the MFIs lending capital).
The May 2001 Focus Note Series published by CGAP points out that, "While savings allow the poor to cushion for future
events or emergencies, micro-insurance offers a way to manage specific risks by sharing the cost of
unlikely events among many poor households." The publication goes on to say, "Like savings, direct
provision of insurance services requires significant skills and systems, as well as institutional
permanence. For this reason, NGOs may again best serve poor households by helping them gain access
to the services of strong and established insurance companies."
Certain MFIs have taken
leadership roles in providing microinsurance, including insurance for health, death, and property
damage, to the poorest borrowers. For instance, the
Foundation for International Community Assistance (FINCA) provides financial services to the
world’s poorest families so they can create their own jobs, raise household incomes, and improve
their standard of living. In addition, Uganda FINCA acts as an agent for a formal credit and death
coverage plan with an established insurance agency, AIG. In the event of the death of a FINCA
client, the client’s credit insurance pays the balance of her loan, taking the burden off the other
members of her Village Banking group. In the case of a client’s accidental death, the insurance
pays a specified amount to family members whom a client designates as beneficiaries.
FINCA’s Health Care Program was started in mid-1999 through a reputable mission hospital,
Nsambya Hospital in Kampala and has since been extended to other hospitals and localities. This
program provides hospital care for illnesses including HIV/AIDS. The client, spouse, and two
children are covered under the standard payment (about $15 for up to $200 worth of coverage for
four months) and may choose to cover additional children or family members for an additional fee.
Additionally, clients are expected to pay a small co-payment for outpatient and inpatient visits
(about $0.57 for outpatient and slightly higher for inpatient). The coverage includes outpatient
and inpatient services, referrals, surgery, X-rays, ultrasounds, prescription drugs, dental care,
and optical consultations among many other services. Currently about 300 clients (less than 5% of
FINCA Uganda’s total client base) in the Kampala region of Uganda participate in the program, but
there has since been a huge demand to spread the program.
Through these insurance
programs, FINCA hopes to foster more stable Village Banking groups and better repayment rates.
More importantly, they expect to see "healthier communities, increased asset accumulation by poor
families, and a reduction of the financial and caretaking burdens that AIDS and HIV has placed on
Uganda’s low-income women."
Other MFIs, such as the Grameen Bank in Bangladesh, are
beginning to follow this lead and attempting to provide their clients with affordable insurance
along with their traditional small business loans. They are beginning to recognize that an
increase in income cannot fully benefit a low-income household, if their exposure to risk remains
at the same extremely high level. While microinsurance does not decrease the risk to completely
'average' levels, it seems to be a successful initiative in providing the poor with coverage, and
at the same time, not over-burdening the MFIs.
© Calvert Foundation
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