Providing insurance to protect the world’s most vulnerable people seems like a no-brainer, but putting microinsurance into practice is easier said than done. A recent event co-hosted by FAI and Allianz SE – a leading global financial services provider – shared new and practical insights from the insurer’s perspective about the challenge of desigining effective insurance products for the poor.
Held at the Allianz Global Investor headquarters in New York City on September 22, the discussion was moderated by Robert Schiff and Tony Goland from McKinsey’s Social Sector Practice. Heinz Dollberg and Michael Anthony of Allianz discussed the barriers and opportunities for larger players in the microinsurance market and about Allianz’s experience following Cyclone Nisha in 2008.
The session began with an assessment of potential markets for the Allianz group. Michael Anthony stressed that emerging markets, especially India and Indonesia, but also including Egypt, Senegal and the Ivory Coast in Africa, and Brazil and Colombia in Latin America, were particularly attractive because of growing populations and an awareness and demand for insurance products.
Three types of products are typically offered in each of these countries – simple credit life insurance; accident / life insurance products which are linked to savings; and new products that address the specific needs of people in developing countries . . .
Read MoreSocial finance is becoming an important new area of research for FAI. As we delve into that arena, look for blog posts on this topic by us and others. Here we’re pleased to feature a guest post from impact investors Gray Ghost Ventures.
How does Gray Ghost define impact investing?
Impact investing is a pretty broad arena. The part we focus on is looking for market-based investment solutions to poverty alleviation—the merger of both societal impact and financial return. It’s a broad spectrum, but within that we’re probably closer to the expectation of market-like returns, whereas others would not necessarily be on that edge—there are others who are seeking social impact and a financial return, not necessarily market-like. While we respect all the different pieces, we think that unless you get a financial return, you’re less likely to get to scale and replicability, because it’s less sustainable and more dependent upon other sources of funding that are more fickle and erratic . . .
Read MoreThis is the second of two guest posts by Barbara Magnoni, President of EA Consultants, on what we can learn from Banex and its demise. Banex had been one of the most prominent microfinance institutions in Nicaragua, but as it pushed forward with an aggressive growth strategy, its foundations proved weak. In early August 2010, Banex (formerly Findesa) entered liquidation. Magnoni gives starting points for understanding how the bubble burst.
While I do not claim to understand the dynamics of Banex’s drastic deterioration, I would propose we examine some possible causes to avoid repeating mistakes in other MFIs and other countries. Some of the issues to take into account (in no particular order) are:
1) Extremely fast growth and how this may have affected loan analysis (when entering new areas such as livestock, consumer lending and agriculture) as well as hiring practices, training of new staff, and conformity to loan policies and procedures.
2) Incentive schemes . . .
Read MoreThe SKS IPO is a microfinance milestone: the first IPO of an Indian microlender – an event big enough to be covered by the international media. When the first IPO happened in Mexico in 2008, Banco Compartamos was attacked for its high interest rates and (arguably) excessive profit rates, with Muhammad Yunus leading the charge.
This time, there's controversy of a different sort: the focus is on the investors rather than the microlender, namely Unitus. This is Jonathan Lewis, founder of Opportunity Collaboration, pinning down the questions swirling around Unitus, a key SKSsupporter which has, at best, massively botched its PR strategy:
With its announcement, Unitus unleashed a series of web and media commentaries . . .
Read MoreTwo very different events hit the microfinance world this summer. In India, the SKS IPO sparked debates about the lines between profit-making and social responsibility when investors profess a “double bottom line.” In Nicaragua, the failure of Banex is an event that may have even wider reverberations. This is the first of two guest posts by Barbara Magnoni, President of EA Consultants, on what we can learn from Banex and its demise.
I have been working with the microfinance sector in Nicaragua since the end of 2004, arguably the beginning of the “bubble.” At the time, Nicaragua was strangely popular among investment funds, due to its relatively mature microfinance market, which had received support from various donors over 15 years. This aid ensured a certain level of efficiency, transparency and best practice that helped convince investors to keep pouring money in, as more and more money was coming to investment funds from donors, socially responsible and commercial investors.
Since then, MFI performance has plunged . . .
Read MoreIn a previously posted video, FAI’s Jonathan Morduch talks about providing the “ultra poor” – people who live on $1.25 a day or less – with financial services.
As Jonathan said, BRAC’s program, Challenging the Frontiers of Poverty Reduction – Targeting the Ultra-Poor (CFPR-TUP), has been a trailblazer in reaching extremely poor households. At the same time, the question of the program’s impact must be taken up more rigorously. BRAC has made valuable efforts to measure the impact of this program, and published several working papers providing insights into whether and how CFPR-TUP works. A new working paper came out in June 2010, investigating the long-term impacts of the program with panel data.
These evaluations, however, did not rely on a randomized controlled trial methodology (RCT). . .
Read MoreCan the poorest be reached with finance? "Ultra poor" members of society face a series of constraints and deprivations that distinguish them from the general poor. Limited social networks, chronic malnutrition, and reliance on patronage systems characterize a socioeconomic class that is hard to "bank."
Read MoreBillions of poor households around the world lack access to basic financial services. New ideas about banks can translate into workable financial institutions that serve the poor around the world . . .
Read MoreFor those of you who couldn’t attend Wednesday’s event, “Microfinance's Social Impact: Cutting through the Hype,” sponsored by the Microfinance Club of New York and hosted by FAI, here’s a recap.
The panel featured FAI’s Jonathan Morduch, David Roodman, a senior fellow at theCenter for Global Development, Chris Dunford, President of Freedom from Hunger, and Jody Rasch from Moody’s Investors Service.
We were happy that the moderator started the event by making the important distinction between social performance measurement and impact evaluation. Social performance measurement seeks to answer the questions of how MFI clients are doing, and how MFIs can help serve those clients better. Social impact evaluation, which is the focus of much of FAI’s research, tries to answer the question of what would have happened to people in the absence of microfinance. . .
Read Moren a previous post, I wrote about my visit to SafeSave in Dhaka. SafeSave also has a cousin organization, called Shohoz Shonchoy (“Easy Savings,” in Bangla), that operates in rural Bangladesh. Shohoz Shonchoy employs the same flexible methodology as SafeSave, with collectors visiting clients every day to allow clients to make financial transactions from their homes or workplaces. Shohoz Shonchoy has been providing a fascinating product since 2007. Product 9 (P9) incorporates many new insights into poor people’s ways of managing their financial lives, and makes it easy for them to save . . .
Read MoreLast week I had the pleasure to visit SafeSave, an unconventional microfinance institution operating in Dhaka, Bangladesh. SafeSave was founded by Stuart Rutherford (among other things, author of The Poor and Their Money and co-author ofPortfolios of the Poor) and puts a very interesting twist on the traditional model of credit-led microfinance institutions. (To see Stuart Rutherford discussing SafeSave, seeVideo IV, at the 5:30 mark.)
SafeSave provides financial services to very poor clients without relying on group meetings, joint liability, guarantors, or even fixed weekly loan repayments. It was set up as an experiment, to learn whether a flexible, non-group lending methodology would be sustainable. In practice, a lot of the common microfinance wisdom is challenged, and it works: the repayment rate, for example, stands at 95 percent. This is just one statistic. More importantly, I think SafeSave’s methodology is a great way of serving clients with a flexible and convenient system that matches their needs in a unique way.
At the heart of SafeSave’s methodology are the 66 collectors, who visit clients at their homes or workplaces every day and provide them with an opportunity to make savings deposits or withdrawals, and repay their loans (clients need to go to the branch for loan disbursement and large savings withdrawals). All collectors are women who come from the same neighborhoods that SafeSave serves. To match clients’ irregular income flows, savings and loan repayments are optional, and clients choose how much they want to save or repay on a given day. Loans therefore do not have a definite term . . .
Read MoreAs a quick follow-up to Meredith's post, I wanted to add a few additional thoughts.
Meredith mentioned that "at IPA, we always strive to conduct research in a way that identifies not just whether an isolated solution works, but why it works, so that we gain information about what was causing the problem in the first place.' The majority of IPA's projects involve randomized evaluations in the developing world, and we have been able to replicate similar evaluations in various contexts in order to understand the local factors that play a role in a program's impact. While individual randomized evaluations may be criticized for their external validity, the replication approach helps to address that concern. Ultimately, numerous points of light shine through and we begin to develop a holistic perspective on things.
Which is not to say that randomized evaluations are the only way to go about things; but they play an integral part in the development of functional problem-solving systems. This is something that top-down development advocates would do well to take note of. For instance, development theorists are constantly on the lookout for the "right" institutions. As Banerjee (2008) observes, the institutionalist literature is still unclear as to what sort of institutions need to be encouraged, with few reliable policy prescriptions having emerged. If you subscribe to the thinking of seminal institutionalist thinker Douglass North, institutional change is overwhelmingly an incremental one. Alternatively, you could subscribe to the original Shock Doctrine that advocated inter alia rapid, wholesale change.
Although I don't quite subscribe to all the rhetoric of shock doctrine critics, I think there is enough reason to believe that institutional change should be an incremental process; after all, when we barely know what institutions truly work, how could we advocate system-wide changes?
Read MoreIn microfinance, the issues that get the most play tend to be the ones most closely related to bottom lines: What are the net impacts on households? How do institutions achieve sustainability? Which mechanisms work, and why? But sometimes, in our pursuit of headline results, we skip over quieter details that tell us something important. Take-up rates often fit this description. In a new FAI Framing Note by Dean Karlan, Jonathan Morduch, and Sendhil Mullainathan, we pay them some much deserved attention.
Take-up rates are the proportion of individuals from a defined population who participate in a program. They are surprisingly variable and, in some cases, surprisingly low: data from 2 surveys and 13 projects show that take-up rates of financial services range between 2 and 84 percent of eligible individuals.
By revealing valuable information about customers’ interest in a particular product or service, take-up rates give us a way to quantify demand. Low take-up rates also can suggest pent-up demand for products that are differently designed or priced. In addition, take-up rates have a technical implication for impact evaluations: when they are very low, researchers need data from a much larger sample to get results they can be confident in.
In a way, take-up rates are always a bridesmaid and never the bride . . .
Read MoreA few days ago, Bill Easterly argued on Aidwatch that development comes not from solutions, but from functional problem-solving systems that motivate and facilitate solutions. In many ways, this is an argument for bottom-up, decentralized development, where people with local knowledge and first-hand experience of outcomes are the ones who determine what needs to be done.
On a deep level, Easterly is right, and not just because identifying the right solutions requires local knowledge. It’s also about sustainability, in a literal sense. In order for actual development to occur, solutions have to be imbedded in a local system that drives and sustains them without constant flows of money from NGOs or donor governments. Otherwise, it’s not development, but rather a permanent system of redistribution from wealthy countries to poor ones. It’s like claiming to cure an ill person by keeping her on life support. A person who is on dialysis and pain medication is alive and comfortable – and that is almost certainly better than the alternative. But, real healing would imply that we have figured out what’s wrong with the liver and fixed it, so that the body’s system is doing its own miraculous thing without mechanical intervention. Forcibly simulating the outcomes of good system can temporarily get you better health and education and housing, but it only goes so far . . .
Read MoreWhen CARE India field officers delivered emergency relief services to the coastal regions ravaged by the 2004 tsunami, they were struck by the communities’ vulnerability to shocks and lack of access to appropriate risk protection tools, and assessed that microinsurance could be an effective product for these communities. Out of this determination, the CARE Insure Lives and Livelihoods (ILAL) microinsurance program was born. In introducing this new program, CARE set out to improve communities’ risk management capacities by improving their understanding of insurance.
A new case study from FAI takes an in-depth look at the key challenges—such as sustainability and performance measurement of the education programme—and how CARE tried to overcome them . . .
Read MoreThat is indeed the question when regulators so often find themselves playing catch up – trying to figure out if and how something that’s already happening should be supervised. When it comes to prudential regulation – or, safeguarding deposits – the stakes are particularly high.
In microfinance, most MFIs aren’t big enough to threaten the health of the financial systems they’re part of if they run into trouble. However, if prudential regulation of microfinance is inadequate – or when it fails – poor customers stand to lose their savings entirely. And the stakes really don’t get much higher than that.
As with other forms of regulation, the basic dilemma is that regulators of microfinance want to ensure the health of financial institutions without creating undue burdens on the institutions, or on themselves. Striking the balance is tricky when experience with regulating financial access and evidence to support hypothetical costs and benefits are so thin.
In his third Policy Framing Note for FAI, David Porteous sheds some light on why these challenges are so, well, challenging, and describes early experiences with prudential regulation of microfinance in India, Nigeria, the Philippines and Nigeria.
According to the paper, there are two basic ways to integrate microfinance into regulatory frameworks. One is to amend existing regulations; the other is to write new laws that open special “windows” for microfinance. The window approach is appealing, since microfinance is a rather unique animal in the world of financial services . . .
Read MoreThe premise of microfinance is that very small loans can make a big difference. The argument is that getting capital to cash-starved “micro-entrepreneurs” will go farther than getting capital to cash-starved small business owners. The premise is plausible, but the opposite is also plausible. Rather than going micro, bigger businesses may be able to generate better jobs and do so more efficiently. Those bigger businesses may be able to generate bigger impacts directly via job creation and indirectly through regional economic growth.
Sometimes bigger might be better. The problem is we don’t have much good evidence to go by.
That’s going to change. We’re already getting cautionary evidence on micro-enterprises. The big randomized control trials of the past year yield tepid conclusions – which is helping to open the door to thinking about interventions to support bigger businesses. In India, for example, a JPAL/IPA/FAI study finds that business owners who received microcredit did not report having more employees 12 to 18 months after receiving their loans. Karlan and Zinman (2010) take a look at microcredit in the Philippines. They find a surprising decline in the number of paid helpers in Filipino businesses that received a microcredit loan. The studies are described here . . .
Read MoreIn 2009, the results from the first randomized control trials in microfinance were released – and they’ve been stirring up controversy ever since. The studies’ failure to find a strong causal link between financial access for the poor and poverty reduction spawned a particularly heated debate between microfinance practitioners and advocates versus researchers.
While all of the parties share the same goal of improving lives, team advocate has shown reluctance to embrace the results, continuing to point to anecdotal evidence (in joint written statements no less), while team research has stuck to its guns, emphasizing the potentially positive outcome of these trials – i.e., the opportunity to understand how to better serve poor clients . . .
Read MoreMost players in the microinsurance sector would agree that to increase the outreach of microinsurance products, more education is needed. But, this is where the agreement ends. Discussions around content, delivery, funding and measurement of insurance education raise more questions than answers. What is insurance education, and how should we define it? How is it different from product marketing? What are the most effective delivery channels? Who should pay for education? How do we measure its impact?
Read MoreKey Principles of Designing Financial Services
• Daryl Collins posed the question of whether product design for the poor needs to undergo a complete and utter re-think, or whether tinkering around the edges is sufficient.
• The conversation about how to formalize some of the informal mechanisms (such as savings groups) that seem to be working for poor families continued. While Village Savings and Loan Associations (VSLAs) and Savings and Loans Groups (SLGs) seem to be a sort of “savings club plus” with enhanced reliability (in theory), Daryl wondered whether there was evidence that they actually do enhance reliability in practice.
• Daryl followed up on the VSLA and SLG conversation and noted that they were largely absent in any of the three diary countries. Based on her observations and familiarity with other research, she suspected that there would be take up despite the existence of other centrally offered services. Daryl wondered whether people save more in VSLAs than in other more traditional types of financial devices, like a bank account. Citing research from the South African diaries, Daryl reported that respondents saved much more of their monthly income in savings groups than banks, despite holding accounts in both types of accounts. She wondered how these patterns shift when a new type of channel, such as m-banking is introduced into the picture.
• Jonathan Morduch offered his comments on the VSLA discussion and commended Daryl for her question about what happens when people have the choice to save/borrow in VSLAs versus in traditional banks. Jonathan cited observations from Tanzania where the population using VSLAs is distinct from the “banked” population. In Tanzania, the VSLA-users Jonathan saw were also in ROSCAs. This portfolio allowed for greater flexibility and is in accord with other parts of East Africa where it is common for people to be in several ROSCAs simultaneously. Jonathan cited a surprising element in a two-year VSLA in Tanzania where the dividend was divided based on cumulative savings, without regard for whether the savings were deposited in the first month or the 24th. While this arrangement made things simpler for the group, it seemed problematic for economists who weigh the “time value of money” heavily.
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