Thursday, May 7, 2009

Microinsurance: Credit Insurance for the Little Guy?

Introduced as part and parcel in the financial service of microfinance / microcredit clients, does microinsurance really protect the “Little Guys” – i.e. microcredit-funded entrepreneurs?

By: Ringo Bones

Ever since the runaway success of Dr. Muhammad Yunus’ Banking for the Poor-inspired microcredit and microfinance programs across the globe, many microfinance institutions had began introducing microinsurance services in order to protect the financial successes of microfinance and microcredit clients against the onslaught of the global economic downturn. Given that some established “conventional” economist had always been skeptical of these “extremely subprime loans”, does microinsurance really protect these small business owners against the economic uncertainties of the global credit crisis circa 2009? Or is this just a “brilliant” financial instrument made to extract the maximum amount of profits from the poor microcredit and microfinance clients.

According to some official microcredit and microfinance service providers’ websites, microinsurance is defined as a system by which people, business, and other organizations funded by microcredit and microfinance programs make premium payments to share risks. Access to insurance with low premium rates enables microcredit funded entrepreneurs to concentrate more on growing their business – i.e. reinvesting a significant portion of their profits back into their business – while providing mechanisms that mitigate risks affecting property, health, and the ability to do work. Especially during the fiscal uncertainties of our current global economic downturn where every corporate and business entity of every size, shape or form are affected in a negative way.

The rationale behind microinsurance is to provide a system that will help poor people - especially microfinance and microcredit recipients – cope with sudden expenses associated with serious illness (current swine flu outbreak?) or loss of assets. Studies recently conducted on microfinance and microcredit recipients / clients have shown that merely having access to conventional savings accounts has also proved to be an incentive to save for that proverbial rainy day. Clients who join and stay in microfinance / microcredit programs have better economic conditions than non-clients do – at least from a cash-based / credit-based economic point of view.

The question now is does microinsurance – like it’s well established sibling, credit insurance had done to big business – really help microcredit / microfinance recipients? Though it is yet a relatively new financial scheme, microinsurance – at least on paper – could theoretically provide microcredit and microfinance institutions around the world the ability to provide financial security to their established clients. As an investor in our local microcredit / microfinance provider for almost five years, I’ve noticed that our local fish and fresh produce vendors had been enjoying relative financial security that can’t be found just ten years before. And this was the advent before microinsurance schemes were introduced. From my point of view, it is still way too soon to conclude that microinsurance – in actual practice – is just another useless business expense. Maybe we’ll check it out in a few months’ time.

1 comment:

Sherry Rashad said...

I think anything that makes microcredit and microfinance loans more accessible to the poor people of the developing world while providing the necessary incentives to investors who chose to invest in such financial schemes should be embraced with open arms. Given that the "old banks" are primarily staying away from investing their money in emerging economies - like the BRIC countries - i.e. Brazil, Russia, India, and China. And instead choosing to invest in more established Western economies like the UK and the US.
Microinsurance could be this mechanism that provides security and incentives to microfinance and microcredit investors while providing financial security to microcredit loan clients - i.e. borrowers.
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