From Microfinance to Microinsurance – the Quiet Revolution

Published on 29th February 2008

In 1976, Economist Mohammed Yunus created a unique revolution in the financial services sector that debunked the banking myth from its widely held traditional mentality of collateral. He brought banking closer to the village and developed collateral substitutes. Yunus lent small amounts of cash to rural women in Bangladesh to start or expand their businesses. The recipients ran successful enterprises and promptly repaid their credit. This led Yunus to formalize the establishment of the Grameen Bank in 1983. The humble common man’s bank has lent to millions of borrowers and disbursed millions of dollars. Yunus gift to the world has since pulled millions of people from abject poverty.

Microfinance is key to poverty alleviation. The basic rationale and principle driving the microfinance sector has been: using clients character and peer pressure (rather than collateral) as the primary loan security to streamline operations, lower costs, deal with loan default and provide incentives for repayments. The mechanism also breaks loan installments to manageable portions, charges interest rates that approach the market rates and emphasizes the future of the client and the institution – the dual sustainability concept.

While banking has been demystified and incorporated in the common man’s mindset (thanks to microfinance) the next battle on breaking barriers of access is expected through innovation and creativity in the insurance industry. The sector’s importance cannot be gainsaid. In the developing world, it requires shedding its 'ivory tower' mentality, innovation and reaching the lower end. This is where the business of the future is for the insurance sector.

Soon, Kenyans shall see  branches of  insurance companies deep in Mathare or Kibera informal settlements, Gikomba, Githurai or Rongai urban satellite towns as is happening  with the mainstream banks. The companies will literally chase after the “mama mboga” either to join a scheme or remind her of her due payment. The companies will literally be friends of the poor and enemies of poverty. The sector will be actively interact with the hawker, the small business man, the casual worker, the construction worker, the traditional birth attendant and the small horticulture farmer back in the village.

Fortunately, this reality is dawning on managers and regulators of the insurance industry in Kenya. The concept of Microinsurance can no longer be swept under the carpet. The active poor have money, businesses, property and lives to be secured. The future of business is in linking with the common man. Take microfinance for example, the institutions that realized this sometimes back in the 80s and early 1990s are becoming multinational corporations today, a feature that no one expected two decades ago. Working with the poor and making money with the poor as they fight their poverty will be the largest growth industry of the future. The insurance sector cannot afford the luxury of a laggard in a fast paced world.

Microinsurance simply put is the provision of insurance to low-income households that cannot afford the annual premiums in the mainstream insurance sector, yet they desire to secure their business and loved ones. Poor households are especially vulnerable to risk, both in the form of natural calamities and regular occurrences of illnesses, accidents, theft and death. Such events translate into crisis and erode economic gains made. It’s these effects that micro-insurance should find ways of easing. The post election violence is a telling story to many Kenyans on the need for these services.

Getting the micro-insurance concept to work will face challenges, among them: some institutions may not have worked with the target customer before; designing products  for the poor with manageable premiums yet making a profitable relationship; ensuring timely payment of premiums; developing  management information systems; control of moral hazard and fraud. The success therefore shall be hinged on information gathering and effective management of formal and in-formal networks. It’s definitely an ultimate test, but one which the regulatory authority has a greater role to play. As the microfinance sector has shown, serving marginal customers can be feasible and profitable, but with a caveat – only when rolled out to serve a large client base. Effective targeting, volumes and on-time premium payments shall among others be the secret to successful microinsurance industry in Kenya.

It’s these realities that are making the insurance and the microfinance industry look forward with great interest and anticipation to the rolling out of Cooperative insurance Company (CIC) microinsurance product in May 2008. It’s also the hope of the industry players that the Insurance Regulatory Authority will provide effective leadership by quickly developing a legal framework to anchor this nascent but important initiative.


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