Imagine this: an impoverished family in southern Uganda is barely making ends meet. The father, the head of the family, is a farm laborer and the primary wage earner. One day, he contracts malaria. The family loses its source of income, and is unable to pay for malaria medication.

Some microfinance institutions such as Grameen Bank have started offering insurance on livestock.

Life looks grim for this hypothetical family in Uganda, and unfortunately, situations similar to this occur all the time in developing nations. Impoverished families are affected much more by problems such as sickness and robbery than other, better off families. In many developed countries, insurance systems exist so that the huge financial burdens created by unforeseen disasters do not send people into poverty. Fortunately, financial services such as insurance—called ‘microinsurance’ when it is geared towards poor families—are gradually making their way into the lives of the poor.

Now that microcredit has become a major tool for poverty alleviation across the globe, some organizations are looking beyond simply lending money to poor people. Their goal is to bring to this population the financial services that the developed world enjoys, including loans, insurance, and savings programs. This new field, called ‘microfinance’, includes microcredit, but is not limited to it.

Top

Microcredit involves simply loaning small amounts of money or capital. Microfinance can take the form of microcredit, but also includes other financial services such as microinsurance and microsaving.

Top

Microinsurance can cover assets such as homes.

Microinsurance is almost exactly the same as standard insurance, except that it is directed toward poorer people. Microinsurance allows poorer families to recover from large financial setbacks such as sickness and property damage. Each participating member makes small, regular payments, called premiums, to the microinsurance agency, forming a ‘risk pool.’ Then, if a family in the risk pool experiences a problem covered by the microinsurance program, it receives money from it.

One of the most common uses of microinsurance is in health care. Many microfinance institutions (MFIs) now offer health insurance along with standard financial services such as microcredit. Suppose a participant in the program gets sick and needs to buy medicine that costs $10. While he might be unable to pay that amount on his own (maybe he only has $5 saved), his insurance premiums allow him to obtain assistance from his health insurance and purchase the medicine. By sharing risk—in this example, the risk of getting sick—individuals who need access to potentially expensive medication can be sure to get it.

While MFIs have been somewhat slow to offer microinsurance, the service is now spreading. Health insurance for the poor is the most popular form of microcredit right now, because access to health care has always been a major problem in developing nations. Additionally, MFIs are slowly developing other forms of microinsurance. Grameen Bank in Bangladesh, for example, offers insurance for property damage: it will pay for damage to a home, or the death of livestock, or other damage to property. MFIs are also teaming up with for-profit insurance companies. Providing good insurance is often too difficult and technical for MFIs alone, and by involving insurance companies, they split duties. The MFI provides the clients and helps participants directly, while the insurance company provides management for the program. In Uganda, for example, the MFI FINCA cooperated with American Insurance Group to start their microinsurance program.

Top

Poor families often have no safe storage place for money, leaving them vulnerable to robbery.

Microsaving programs act much like savings accounts in the developed world. Many impoverished families have no safe way to save cash. They are forced to hide money in unsafe locations—under beds, beneath floors, and so on—which makes them vulnerable to robberies. Also, in many developing countries, the value of the currency varies widely due to factors such as inflation, which can decrease the value of a currency. While inflation exists throughout the world, it can be particularly devastating in developing countries: in the U.S., for example, the inflation rate is about 2.5%; in Zimbabwe, an impoverished African country, hyperinflation exists, and so the inflation rate is about 420%. Taken together, these factors lead many impoverished families to invest in non-cash assets, such as jewels, to save their money. Microsaving institutions try to help poor people in this effort. They allow for safe storage of cash, and sometimes even allow users to receive interest on their deposits. In this way, the families can be confident that their savings are safe and secure, readily available when they need them.

Top

Microfinance is still a developing field. Only the microcredit aspect of it has been developed on a global scale; indeed, microcredit led to the development of microfinance in the first place. MFIs around the world, however, are broadening their horizons, and have started offering more than just microcredit to clients. Also, more and more MFIs are partnering with commercial banks so that the MFI gains the financial expertise of bank staff, and a bank gains a new customer base. As more financial services, such as microinsurance and microsaving programs, are added to MFIs, more and more individuals may be able to escape poverty. Yet, as MFIs increase their services and team up with banks, they must be careful to always keep the needs of their poor clients – and not the profit-driven models of standard businesses – first (see ‘Problems with Microcredit’).

Top

ACCION: Assisting Commercial Banks to Start Microfinance Programs (PDF)

ACCION: Microinsurance (PDF)

Health Care MicroInsurance Synthesis Paper. 2005.

Microfinance Gateway: Microfinance FAQ

Microfinance Gateway: Microinsurance FAQ

Unitus: What is Microfinance

Year of Microcredit: About Microfinance Brochure (PDF)

Yunus, Muhammad. Telephone Interview. 8 December 2005.

Top

Copyright © 2006 ThinkQuest Team 00282