Country: Morocco

The growth of micro-insurance: expanding financial inclusion

Posted on by TIMOTHYRADIER

Access to insurance across sub-Saharan Africa (SSA) is still very low and estimated to cover only around 5.4% of the population (approx. 61.9m people)[1]. Most of this coverage is represented by life insurance products, the penetration of which still pales in comparison to most developed markets. In these markets, insurance products are part of the financial landscape and are more of an expectation rather than the exception. However, attitudes of insurers in SSA are changing. Financial Sector Deepening Africa’s (FSDA) work with the International Labour Organisation (ILO) has shown that insurers across the continent are looking to serve the market on a larger scale and through new channels.

Financial Inclusion has come a long way. Not long ago, the widespread definition of what it means to be “included” would only focus on access to a bank account. Thankfully, that notion has changed. A broader definition of the term has led to the development of many more services and ways to help lift the poor out of poverty – mobile money being the most prominent example.

Over the years, donor organisations (and market players) have understood that bank accounts are not enough to replace the abundance of products currently being used by people at the bottom of the pyramid. An in-depth look at the financial choices made by Kenyans in 2014 showed that the average household uses 14 different financial products.[2] Basically, the majority of people who have informal jobs are constantly juggling financial products, just to get by. About half of the respondents surveyed had an insurance product (directly or through welfare groups). However, effective use of formal insurance was low.

Improving and expanding insurance products for the poor

FSDA is in partnership with the ILO to expand microinsurance penetration in SSA thus helping poor people protect themselves against economic shocks. The FSDA funded project is looking to develop and grow new and existing microinsurance products across SSA[3], focused on the needs of the customer at or near the bottom of the pyramid. Together with the ILO’s Impact Insurance Facility, FSDA will work with five insurers and/or distributors in four countries – Kenya, Nigeria, Cote d’Ivoire and Ethiopia. The project will provide an inclusive financial service to more than one million low income people and micro, small and medium-sized enterprises (MSMEs) who will gain access to insurance products that protect them from life’s surprises.

Creating relevant microinsurance products

Most of the continent’s large insurers are bureaucratic and focus on standard general and life insurance products. Not only are these products unaffordable to the bottom of the pyramid, but most people do not qualify for the products as they usually require formal employment. In a context where informal employment is estimated to be between 60% and 80% across Sub-Saharan Africa, this excludes a large part of the population.

Change Management

Insurance organisations need to change people, systems and processes of how they approach the SSA market. Ultimately, there is work to be done to help move these insurance companies & distributors from providing an exclusive product to becoming an inclusive provider. FSDA’s project will involve supporting consultants to work within the selected insurance institutions for three years to help them manage the change from within. These consultants will work to deliver and develop services that are designed to help insurers expand their reach and become both profitable and highly scalable.

Partner Selection

Insurance is an important part of financial inclusion as it helps people to prosper and mitigate risk necessary to grow productive businesses. To ensure that capable and willing partners were found to drive this market-wide change of the insurance market, FSDA opened applications to insurance companies across the continent who are looking to change their target market to include the financially underserved. The application process was open from December 2015 to mid-January 2016 and attracted over 32 proposals from East, West, and Southern Africa. The number and quality of these applications show that the Sub-Saharan insurance industry is ready for a paradigm shift in their approach to microinsurance.

Mobile channels are boosting product access

Majority of applicants for the funding wanted to build on the rapidly growing mobile channel in all of their respective markets. The increasing presence and growth of the mobile channel has helped to boost inclusion of access to financial services.

Insurers are recognising the different needs of their markets. However, regional differences remain and reflect the level of development of the existing insurance market. For example, many proposals from West Africa, a much more nascent insurance market, focused on providing the simpler products, such as health or life insurance. By contrast, in East Africa, insurance was focused on complex products, such as weather-based index insurance or insurance for small and medium enterprises.

The insurance space in Africa is rapidly evolving and FSDA’s role will be to guide motivated and committed insurers to make the changes necessary to grow their footprint in the underserved market.

[1] The Landscape of Microinsurance Africa 2015 Preliminary Briefing Note by Microinsurance Network.

[2] Kenya Financial Diaries; August 2014

[3] Kenya Financial Diaries; August 2014

Measuring financial market facilitation: why the theory of change is king

This is the second of a four-part serialisation of the full Impact Oriented Measurement (IOM) guidance paper.

In the first serialisation, the principle objectives of IOM and the background to its development was provided. The first, second and third chapters were also discussed.

This second serialisation (Chapter 4 of the full IOM guidance paper) draws attention to the Theory of Change (ToC), a critical tool in the IOM system.

In particular, this Chapter:

  • Discusses the definitions of, purposes of and relationships between ToCs, results chains and logframes. It clearly explains what each of these tools are, what they are for and how they can be best developed for market facilitation programmes. It also demonstrates how project-level results chains should ‘nest’ within programme-level ToCs. In doing so, this Chapter helps to de-mystify the application of these tools within a programme’s overall approach to IOM.
  • Discusses the identification of impact measurement questions. The Chapter shows that ToCs and results chains help to identify impact measurement questions. It states that: “taking time to think carefully about impact measurement questions…will help focus both measurement and research activities.” This begins the process of monitoring through indicator selection and data collection.
  • Introduces ‘bottom-up’ and ‘top-down’ measurement. Readers learn that ‘bottom-up’ measurement involves the monitoring of the impact of individual interventions, while ‘top -down’ measurement involves the monitoring of financial market performance and socio-economic landscape (including poverty levels) as a whole. By triangulating evidence from the two, it is possible to more clearly discern/attribute the combined impact of a market facilitator’s interventions.

In the next installment – the third of the four-part serialisation – IOM will explore how to measure changes (including systemic changes at the market-level) resulting from FSD interventions and how to determine the causes of such changes.

Impact orientated measurement: monitoring and results measurement for financial market facilitation

In July 2014, FSD Africa began an FSD network-wide consultative process to improve monitoring and results measurement (MRM) for financial market facilitation.

Its specific objectives were two-fold: a) to strengthen MRM processes within individual FSDs at the project and programme level, and b) to develop a more consistent approach to MRM across the FSD network.

Through their participation and with the support of specialists from Oxford Policy Management (OPM) and the Consultative Group to Assist the Poor (CGAP), DFID and the Donor Committee for Enterprise Development (DCED), FSDs explored key MRM issues together. Topics included, for example:

  • Developing a common terminology for MRM work to avoid confusion within an FSD and with key partners (especially donors) and achieve consensus more quickly
  • Consolidating a rich, sometime complex portfolio of FSD project work into a single MRM framework that is coherent and measurable
  • Determining the core components (measurement tools, processes, indicators and management) of an MRM system to enable an FSD to quickly develop an approach that is well-understood, practical and which provides evidence in a timely, useful manner
  • Better defining and measuring change in financial market systems (that is both expected and unexpected) to help prove and improve an FSD’s market facilitation approach
  • Determining an FSD network impact research agenda to create a better understanding of the causal relationships between certain kinds of financial sector interventions and the impact they are intended to generate

The result of this extensive consultation is the Impact Oriented Measurement framework, or IOM.

IOM is a comprehensive resource that helps FSDs, or FSD-like organisations, manage the challenge of measuring their contribution to changes in the market systems they seek to influence.  IOM offers guidance, not a prescription.

There is a high degree of consensus built-in to the model, which is informed by practical insights derived from FSD practice over a decade or more, but also OPM, CGAP, DFID and DCED.

Developing an impact-oriented measurement system

This impact-oriented measurement (IOM) guidance paper has two key objectives that are designed to assist FSDs in their measurement processes. First, to understand how FSD programme investments have contributed to observed changes in the financial sector, and how these changes have improved the livelihoods of the poor. Second, to track and improve the performance of FSD investments, by improving the evidence base regarding what works and what does not.

Five things we used to think about Africa’s credit market

Posted on by TIMOTHYRADIER

For years, donors and regulators have been trying to cook up more mature consumer credit markets in Africa. We used to think we knew the essential ingredients for baking the perfect credit market cake.  But when we look around the world at how credit markets are functioning—especially for low income groups—we find that the credit cake is burnt in some places and raw in others. Something is wrong with the recipe itself.

My research team and I collected in-depth stories from consumers in Kenya, Ghana, and South Africa, to understand the experiences of what we call “cuspers.” People on the ‘cusp’ of poverty and the middle class, already represent almost a quarter (23%) of Africans and as a group, they are growing. They are getting by on $2-5 per day and straddling the informal and formal economy. Their stories tell us that if we want credit markets that support upward mobility—and not just churn—we need to think again about our old recipe.

So here are five things we used to think:

1: l and should displace informal credit. We used to think, that banks and microfinance intuitions are implicitly more “fair” because they have to abide by consumer protection regulations. By extending formal options to previously excluded borrowers, we thought we were liberating them from predatory informal lenders who overcharge, lock people in debt cycles, and use unethical collections practices. We used to think that if banks cut back lending to low-income groups, evil loan sharks will fill the void.

But the reality is much more complicated. Firstly, informal lenders are not all evil. In fact, people told us that informal lenders—both those who charge interest and those who do not—were often more understanding and flexible than formal lenders. Some accept broader forms of collateral and proof of credit worthiness, simplify application and disbursement processes, and explain terms in ways that were understandable, even for the semi-literate. Many informal lenders even halt the accumulation ost when a borrower falls behind, which is very rare for a bank.

Secondly, informal lenders rarely offer products that actually compete with formal lenders. We found that most informal loans were significantly smaller. Informal lenders often cornered the market for $10 loans, while banks were going after those that were many times larger, rarely under $200. Only in Kenya (because of M-Shwari) do we see a bank offering a service that actually competes with informal lenders.

Finally, formal lenders are not all pillars of ethics and as an alternative, people don’t run to loan sharks. We were told stories of predatory lending, opaque terms and conditions, unclear—even intentionally obscured—loan pricing, and condescending and insulting bank staff. And our evidence shows that the main substitutes for formal borrowing are saving and delaying or forgoing consumption.

2: Credit for investment is “good”; credit for consumption is “bad.”  We used to think that because consumption credit does not produce a return, repayment of consumption loans is difficult and just increases the cost of consumption. But, we found many entrepreneurs borrowing for consumption as a means of keeping capital in their businesses. As long as this is a temporary fix and not a habit, consumption borrowing can be hugely helpful. We also see that borrowing for important, time-saving assg machines—can make a huge difference in the productivity of people’s lives.

3: Digital is inevitable. Digital is better. Of course digital lending can reduce cost but, digital is not moving as quickly as one might expect. In South Africa, despite widespread adoption of mobile phones we still see most lending taking place over the counter. In Kenya, mobile lending is taking off, but we see evidence that the lack of a personal relationship with the lender proves a disincentive for on time payments.  Many borrowers delay and default on very tiny loan payments, not because they don’t have the money, but because a distant, digital lender feels so far away.

4: Don’t dampen provider incentives. Yes, we need providers willing to invest in going after new markets, but what happens when those incentives work too well?  Credit to cuspers has been shown to be ‘price inelastic’. The more that’s offered, the more people borrow. Regulation matters.

5: The more cr sharing, the better. We used to think that the better lenders can know their borrowers and assess risk, the more competition and the lower interest rates will fall for good borrowers. Instead, we see that—without effective regulatory enforcement—near perfect information sharing can lead to aggressive lending practices, with lenders pushing credit on viable borrowers. In South Africa, where so much is known about borrowers, risk models can become more and more precise, encouraging lenders to simply price for more risk, increasing interest rates for all and of course the sheer volume of credit extended. In other markets, where lenders know less about borrowers, they are forced to be more cautious.

Credit on the Cusp is an FSD Africa project, implemented by Bankable Frontier Associates.<

What is a micro-mortgage?

Posted on by Kihingu Inc

Micro-mortgages are defined as “housing loans of long duration (generally ten years or more) that exhibit all characteristics of traditional mortgage loans (long repayment period, house as collateral for the loan, ability to foreclose and sell the house in case of default) and are small enough that they can be afforded by poor and very poor households”. The term is often wrongly used interchangeably with HMF, although from the definition above, it is clearly not HMF. But precisely what it is can also be unclear, as a brief look at products on the continent will show.

UGAFODE, a micro-finance bank in Uganda for example started off with HMF lending, but according to them, they then proceeded, to offer “micro-mortgages” because the HMF loans offered were not large enough to purchase land, or erect buildings for commercial and larger residential houses. Its micro-mortgage ranges from US 1,200 – 10,000 as opposed to its HMF loans which average US$ 105. The term of the micro-mortgage can be surprisingly short, as little as only 36 months, very similar to HMF. Real People across the border in Kenya also a micro-financier offers a micro-mortgage for up to 9 years for “home construction”, basically development of a home from ground up. Loan amounts range from US$ 1,845 – 46,125. Housing Finance Kenya, a more traditional mortgage bank similarly has a product of a relatively short period of time, 5 years, for purchase of a residential plot. Besides this relatively short period however, it is very much a mortgage, requiring monthly salary deductions, land as collateral, property life insurance and so on. The same company also has an interesting product whereby plot owners choose from 50 different plans offered by the bank, obtain finance, and then let the bank project manage construction of the house from scratch to delivery within 3-9 months. This innovation presumably bridges the problem of poor market supply, but does not detract from the fact that the ensuing loan is a mortgage with amounts varying from US$ 18,465 – 312,000. KCB in the same country has interestingly a “group micro-finance loan” targeting savings groups. It however uses monthly salary deductions and land title as collateral, and is also very mortgage-like. Equity Bank in Tanzania has a 10 year individual mortgage loan for house or plot purchase for salaried individuals. In Zambia,Cavmont Bank has a mortgage for individuals for 10 years.

From this, it is clear that traditional mortgages are being redesigned constantly to create greater affordability, and what is emerging is an interesting array of products with different adaptations and innovations. The product that results from this re-design is then sometimes, but not always called a micro-mortgage. Sometimes a loan for a shorter period is called a micro-mortgage, for example the UGAFODE micro-mortgage for 36 months. Yet, Housing Finance Kenya has a equally short 5 year loan, this time called a mortgage. Loan size and the target of the loan is sometimes used to distinguish them, but again, the distinction is not very clear. Some micro-mortgages make reference to targeting affordability by “poor and very poor households”. However, the loan, in this case for US$ 1,200 ,may not be for the poor, at least not on this continent. In fact, the difference and distinction between mortgages and micro mortgages is blurred when mortgages are so diverse and may not be that useful. The much more important and distinguishable product is HMF. Not only does is serve lower income people, with much smaller loans but also, and very importantly the lending methodology is very different as formal title as collateral is not essential as it is in both type of mortgages. Rather, other forms of collateral such as group peer pressure are used. There lies the important difference.