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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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