Africa Finance Forum Blog

Microinsurance – A risk managing mechanism for poor people

18.06.2012Claudia Huber

Faisal lives in the rural areas of Northern Mozambique where he earns his living from growing cassava. With the money he makes from selling cassava, he can provide a meager living for his wife and their three children. Besides growing cassava, Faisal and his wife also grow vegetables, such as potatoes and tomatoes for their own consumption. When the weather is favorable and the crop turns out well, they sell their produce on the local market.  

And this is precisely what makes a difference for Faisal’s family: the weather. If the rains come in at the expected time and leave again at the expected time, things go well. However, if the rains don’t come or if the rains don’t leave again, things turn bad for Faisal and his family.  

One of the major risks Faisal and his family have to deal with is crop failure. If they cannot harvest their cassava because a drought or a flood destroyed their crop, they have nothing to sell and nothing to eat.  

Microinsurance is a mechanism to provide cover for this and other types of risk events. Poor people are extremely vulnerable to risks, such as crop failure, the sudden death of a family member, an illness or loss of income or property. Since low-income populations often do not have social or financial protection from own savings or social welfare to help them overcome shocks, they are often very close to dropping into poverty as soon as an unexpected risk event occurs. Insurance is a tool that can help them mitigate shocks that otherwise would have worsened their financial situation. Consequently, access to insurance plays an important role in helping to reduce poverty.  

Whereas microfinance products and services, such as micro enterprise loans and savings have been around for some time now, microinsurance is rather new.  

The International Association of Insurance Supervisors (IAIS) defines microinsurance as “insurance that is accessed by the low-income population, provided by a variety of different entities, but run in accordance with generally accepted insurance practices (the IAIS Insurance Core Principles). Importantly, this means that the risk insured under a microinsurance policy is managed based on insurance principles and funded by premiums”.  

Microinsurance - sometimes called insurance for the grassroots or insurance for all - includes a broad range of insurance products, such as, life insurance, funeral cover, health, invalidity, livestock, crop and asset insurance and can be provided by a variety of organizations, such as microfinance institutions, mainstream insurance companies, NGOs, cooperatives or mutuals.  

The development of microinsurance products that are viable and sustainable for the supplier and at the same time provide value to the poor client faces several challenges. Potential clients often do not know and/or understand the concept of insurance and have generally limited knowledge of financial concepts. Similar to high income markets, poor people often do not trust insurers or insurance companies. The needs as well as the means to pay for an insurance policy of low-income people are different from the high-income population.  

To be viable, it is not enough to shrink traditional insurance products’ premiums and coverage by a factor of 5, 10 or 50 to fit smaller pockets. On the contrary, products need to be simpler in design, have less exclusions and straight-forward claims processes. Finding the most adequate distribution channel for a market which is often geographically dispersed is typically a challenge for an insurer entering the micro segment.  

Besides challenges in product development and distribution, the regulation of the insurance sector can be a bottleneck in many countries. If regulatory requirements are too demanding (e.g. the capital requirements too high or regulation for distribution channels too narrow) it can be difficult for a provider to sustainably offer microinsurance products. On the other side, the regulator has an important role in protecting consumers from inadequate sales or fraud and in enforcing claims settlement.  

After last year’s drought, Faisal and his family had to face a few hard months where they could not spare the money to send their children to school. Faisal has recently heard about an organization that offers insurance for his cassava crop against the payment of a small premium. His neighbor, the sole breadwinner for a family of six, also told him he has taken up a life insurance policy to protect his family in case of his own sudden death. Faisal is interested in learning more about these services and already talked to several people in his community.  

The partnership Making Finance Work for Africa via its German contribution (Promoting Financial Sector Dialogue in Africa: "Making Finance Work for Africa") is supporting financial inclusion in insurance markets for the low-income population. We work closely with the Access to Insurance Initiative (A2ii), a partnership to strengthen the capacity of policymakers, regulators, and supervisors seeking to advance insurance market access, particularly for low-income clients, by promoting sound, effective and proportionate regulation and supervision of insurance markets.  

Currently, we are involved in carrying out A2ii Microinsurance Diagnostics in Mozambique and Nigeria and are supporting together with the Munich Re Foundation and several other partners the update of a Microinsurance Landscaping Study for Africa which will be presented at the 8th International Microinsurance Conference in Tanzania taking place on November 6-8, 2012.      

Claudia Huber is advisor in Financial Systems Development at the Gesellschaft für Internationale Zusammenarbeit (GIZ), where she is responsible for the microinsurance component within the team managing the German contribution to the partnership Making Finance Work for Africa (MFW4A). Claudia is a member of the Advisory Committee of the Access to Insurance Initiative (A2ii) and a member of the Joint Working Group on Regulation, Supervision and Policy of the IAIS and the Microinsurance Network.  
Before joining GIZ, she worked for three years as an advisor to the management teams and in operational positions on the credit as well as retail and banking services sides in various ProCredit Banks in Africa and Latin America. From 2006 to 2008, Claudia worked as an associate microfinance analyst at CGAP, a microfinance resource center housed at The World Bank.  

Making macroprudential supervision work for Africa

04.06.2012Miquel Dijkman

Although the concept of macroprudential supervision dates back to the seventies, it has staged a remarkable comeback since the global financial crisis. There is now by and large consensus that pre-crisis approaches to regulation and supervision lacked a proper “macro” dimension, focusing exclusively on risk within individual financial institutions and insufficiently on assessing and controlling systemic risk. Macroprudential supervision is meant to fill this gap. It requires a holistic perspective on the financial sector, that pays due consideration to the interconnections between financial institutions, markets and infrastructure and the real economy. Operationalizing macroprudential supervision requires progress on several fronts: monitoring risk build-up and detecting when risks have materialized (i.e. macroprudential surveillance), and applying tools to curb the accumulation of risks (i.e. macroprudential policymaking).  

Macroprudential surveillance should thus contribute to more informed choices with regard to macroprudential policymaking. Macroprudential supervision should be comprehensive, capturing the time-series and the cross-sectional dimension of systemic risk. The former refers to the tendency for financial firms, nonfinancial corporates and households, to overexpose themselves to risk in the upswing of a credit cycle, and to become overly risk-averse in a downswing, while the latter refers to the linkages within the financial system that can function as contagion channels in times of distress, potentially creating self-amplifying spirals and severe contagion effects.  

Policymakers worldwide have enthusiastically embraced the rationale for macroprudential supervision. African policymakers are no exemption to the rule, as illustrated at a recent seminar in Douala on the topic where central bankers across the continent exchanged experiences. They strongly endorsed the rationale for macroprudential supervision, but also highlighted the difficulties in putting macroprudential supervision to actual practice. To some extent, this is a challenge that policymakers worldwide are struggling with. A satisfactory operational framework for macroprudential supervision is still lacking and the measurement of systemic risk is still “fuzzy”. In the case of Africa, these measurement issues are often exacerbated by concerns over data availability, reliability and comparability, and capacity constraints. 

Participants of the seminar echoed these concerns, reiterating that the need for additional guidance for the practitioner. This includes a clarification of the scope of macroprudential supervision, its relation to existing microprudential supervisory frameworks, and the nexus between macroprudential surveillance and macroprudential policymakers. Policymakers in emerging market economies would also benefit from a systematic appraisal of the suitability of the various instruments (such as forward-looking provisioning requirements and countercyclical capital buffers) in light of the overall stage of economic and financial development: financial regulation is not without costs and there are concerns that measures to smooth the credit cycle can delay financial development.

Another important set of questions relates to the relevance of macroprudential supervision for African policymakers. Its relevance depends on many factors, especially the stage of economic and financial development. As a general rule, macroprudential supervision gains in importance as financial systems mature and deepen. The process of financial deepening is often accompanied by a changing composition of the financial system, with an increasing share of new financial instruments, greater leverage and the emergence of financial intermediation outside the realm of the deposit-taking banking system. Also, increasing cross-industry and cross-border integration contribute to greater interconnectedness of financial systems, both nationally and internationally while financial innovation leads to a more complex financial system, in terms of the intricacy of financial instruments, activities, and risks, as some countries in the region have already experienced.

An increasing body of academic research indicates that financial development can propel economic growth, but it also raises the economic costs of disruptions in the financial system, usually in the form of an erosion of economic activity and significant budgetary outlays to support troubled financial institutions. As financial systems mature, it thus becomes increasingly important that policymakers adopt a more holistic perspective on the financial sector and take timely measures aimed at curbing emerging risks to financial stability through macroprudential supervision.

The capacity of the authorities to credibly deliver on a macroprudential also matters. The lead agency responsible for macroprudential supervision, typically the central bank and the supervisory agency, need to be adequately resourced for the new task. Many central banks have established financial stability units responsible for periodic financial stability reports. To be effective, they need a critical mass of qualified staff, and access to information - including key prudential indicators from the supervisory agency. Ideally, the central bank should also be provided with an explicit mandate for financial stability. Since macroprudential supervision is essentially an add-on to microprudential supervision, a robust basic microprudential framework should be in place before branching out into this new territory. Lastly, the authorities responsible for macroprudential policies need to have sufficient gravitas and independence to overcome industry and political pressures, so that the outcomes of macroprudential analysis can be credibly translated into macroprudential policymaking. Scaling up macroprudential supervision can thus be a worthy objective, provided that these preconditions are met.

Miquel Dijkman is a senior financial sector specialist at the Financial and Private Sector Development Vice Presidency of the World Bank.

The Evolution of Financial Rating in French-Speaking West Africa

20.04.2012Stanislas Zeze

Financial rating, this notion that sends chills down the financial markets. Sometimes decried, sometimes extolled, financial rating remains indispensable and seems to have become the pillar of the assessment system of risk cost and return on investment.

Financial rating is the process whereby a rating agency assesses a borrower’s creditworthiness, which is his capacity and ability to meet his short, medium and long-term financial commitments.

There are three types of financial ratings:

  • Solicited rating which is requested by the borrower;
  • Unsolicited rating which is undertaken by the rating agency whose opinion is not binding on the rated borrower; and
  • Mandatory rating which is imposed by financial market regulatory authorities.

Financial rating falls into five credit-risk categories:

  • Corporate Rating (commercial and industrial corporations);
  • Financial Institutions Rating (Banks, Insurance companies, Pension Funds, Investment Funds…etc.);
  • Public Sector Rating (EPN, ESP, local authorities) ;
  • Financial Instruments Rating (securitization, derivatives, other financial instruments); and
  • Sovereign Rating (country and group of countries).

Although it has existed for more than 100 years, financial rating only started in Africa in the 1990s and is still generally unknown, especially in French-speaking countries. English-speaking countries which are more familiar with this system of assessment that started originally in an Anglo-Saxon country (the United States of America), have culturally and naturally embraced this instrument immediately it was introduced in Africa.

Experience has shown that English-speaking African countries were more inclined to adhere to systems of transparency and good governance. It has also shown that the culture of disclosing public information facilitated the introduction of assessment tools based on the availability of information.

West Africa is hosting three of the four African financial rating agencies: Bloomfield Investment Corporation (2012, Cȏte d’Ivoire), West African Rating Agency (2012, Cȏte d’Ivoire), (Agusto (2001, Nigeria) and Global Credit Rating (1996, South Africa).

Financial rating started belatedly in French-speaking West Africa. However, it has rapidly developed over the last three (3) years due, on the one hand, to the introduction of mandatory financial ratings on the financial market of the West African Economic and Monetary Union (WAEMU) for some players, in particular, bond issuers (excluding countries), companies listed on the Regional Stock Exchange (BRVM) and issuers’ guarantors, and on the other, due to increasing awareness of the importance of the exercise on the part of some corporate officials.

This new regulation, which came into force in September 2011, aims at making the capital market more transparent, efficient, effective and liquid by eliminating the obligation of a 100% first demand guarantee for all issuers who obtain an investment rating at the end of the financial rating exercise.

This 100% first demand guarantee increased the cost of borrowing, thereby making the WAEMU financial market unattractive to some players and inaccessible to others.

Furthermore, it created a system of inconsistency between the coupon cost and the borrower’s creditworthiness.

Prior to the introduction of this regulation the promotion and popularization of financial rating was carried out through training and information seminars within the entire WAEMU zone, in collaboration with the Regional Council for Public Savings  and Financial Markets (CREPMF), WAEMU’s financial markets regulatory authority, and the French Development Agency.

In the upcoming months, two financial rating agencies - Bloomfield Investment Corporation and West African Rating Agency – will be accredited by CREPMF. 

Despite the Anglo-Saxon origin and character of financial rating, its development within the French-speaking West African financial market is a sure reality.

Listed and unlisted companies had begun to voluntarily submit to this rigorous financial assessment, transparency and good corporate governance exercise even before the introduction of the new financial rating regulation.

This testifies that the WAEMU financial market environment is mature and ready for financial rating, even mandatory rating.

Financial rating is gradually gaining grounds in the financial market culture of French-speaking West African countries. For example, in Côte d’Ivoire, Bloomfield Investment Corporation has, in four years, conducted more than twenty voluntary and solicited ratings for several public and private corporations such as the San Pedro Port, Petro Ivoire, SIMAT, La Loyale Assurances SA, SIR, to mention just a few.

There is no doubt that the assessment system will strongly contribute to the development of the capital market, in general, and to the development of the financial market, in particular.

I have confidence in the evolving maturity of the French-speaking West African financial market with regard to financial rating because market players seem to be ready and regulatory authorities are acquiring efficient means to make the environment conducive to the development of this formidable tool.

This will have a very positive impact on the economic growth of countries of this zone.

Mr. Zeze is the Chairman and CEO of Bloomfield Investment Corporation, an Ivorian company, subsidiary of Bloomfield Financial Group. He acquired an extended and rich experience in financial and operational risk management from very prestigious institutions and organizations such as the World Bank in Washington as Senior Risk Analyst, Institute for International Economics in Washington DC as Projects Director, National Bank Of Detroit Ann Arbor Michigan as Credit Risk Manager, African Development Bank as Senior Country Credit Analyst and Shell Oil Product Africa Regional Credit Risk Manager for West and central Africa. Mr. Zeze is graduated from Michigan with a BA in Political Sciences and Economics and holds a MPA (Master of Public Administration) specialized in financial risk management and strategic planning for sustainable economic development. He also holds a Business Law degree from University of Nantes, France.

Housing Finance in Africa

09.04.2012Alassane Bâ

Housing finance (HF) in Africa is provided by financial institutions including primary mortgage institutions, development finance institutions, commercial banks and microfinance institutions. It is among the smallest assets in the banking sector, despite the various funding sources. In sub-Saharan African, it represents less than 1% of total GDP, except in Kenya and South Africa where it constitutes respectively 2.2% and 35%.

The weakest link of the mortgage industry is land entitlement. In many African countries, a limited portion of the land is sufficiently titled, limiting individual property ownership. People “own” land but without the title, making the land not mortgageable. The administration vested with land management lack resources and capacity to manage properly the process for creating title and charge over the land. In many countries, the Governments are not giving high priority to land management and titling. The housing policy is not getting resources for its effective implementation to help the mortgage industry grow.

The second aspect is the situation of the capital markets. HF is highly dependent on land management and capital markets development. HF is thus at the intersection of the two spheres, and for it to develop, it requires the development of both sectors. At this point in time, given the situation of the two sectors, it is not surprising to see in Africa a low score for Housing finance but the situation is changing alongside other economic and financial fundamentals in African economies.

Trends in HF

It is discernible that mortgage loans are one of the fastest growing segments of banking products, although they remain the smallest of the financial assets. Many reasons explain this situation. The growing urban population and the burgeoning middle class constitute positive factors that stimulate the banking sector to provide more HF to respond to the needs of the market. This positive trend can be observed in Senegal, Ghana, Ethiopia and Kenya. The main suppliers of funding are the housing finance banks and many other financial institutions.  

The last 5 years have yielded positive trends for mortgage in Africa, thanks to the low inflation and low interest rates. The mortgage in many countries was around 12% in 2010. This was the situation for instance in Kenya, Senegal and Mali. Many financial institutions can issue bonds for its mortgage business (for instance Kenya in 2010). Many pan-African banks are building more capacity to provide mortgage loans, as the financing of the housing sector has been earmarked as a strategic objective for the business growth in the coming years.  

New agenda of reforms for HF development

How can African Governments help to accelerate and consolidate the positive development trends for mortgages? The response is more reforms in the sector and more financial resources and leadership.

It is obvious that the land management, titling and takeover charge over the land should be done in a professional manner and should send a positive signal to all actors  including the financial sector. Improved government leadership and productivity in this sector are fundamental. The land issue is one of the pillars. It requires the development of the primary and the secondary markets in a transparent way. The current situation is a limiting factor for the economic development and the Government is missing an important source of fiscal resources. Land and housing property are generally a niche for taxation.

The capital markets development: Many countries in Africa have implemented reforms to make capital markets a credible source of funding for many sectors including housing. Additional reforms will be needed to speed up the approval of requests for issuing, the reduction of issuance cost, and the enhancement of the level of financial literacy and understanding of all the actors.  The secondary market is very important for the development of mortgages in order to make sure that all players can refinance their loans for mortgages in the long term at a reasonable cost. In many countries there are some good examples in this respect,  such as the Tanzania Mortgage Refinance Company and Caisse Regionale de Refinancement Hypothecaire for the 8 countries forming the West African Economic and Monetary Union. Nigeria is about to set up a secondary mortgage liquidity fund to support the 100 primary mortgage institutions that are struggling to adjust to the change of regulation and access to  liquidity at a reasonable cost.

The Government should promote a single digit mortgage interest rate for all households earning less than USD 500 dollars per month. The biggest issue in Africa is that the current mortgage rates are not affordable in many countries. This policy will have a very positive impact on the mortgage development and poverty alleviation due to the increased activities for the housing sector known for its ability to supply jobs to an unskilled population.

There is a strong correlation between housing development and poverty alleviation. Given the impact of housing development projects on poverty alleviation, international DFIs and Governments should be putting more money into affordable housing. This is one of the best approaches to alleviate poverty in urban and peri urban areas. In addition, the Governments should implement a fiscal policy that gives further incentives to investment in affordable housing. This policy may involve low value added taxation on building materials for low-cost housing, low stamp duties and low income tax.

Affordable housing development is really constrained by lack of housing developers which answer to the requirements such as capital, capacity and available land. There is high demand on risk capital to assist to develop the supply of affordable housing. Shelter Afrique has sponsored the Pan African Housing Fund (PAHF) to help the development of affordable housing.

It is important to assist the Governments and financial institutions to develop their capacity to service the mortgage industry International development institutions should promote adequate reforms related to land ownership such as the project financed by the World Bank in Morocco. This project has been having a transformational impact on the eradication of slums in Morocco and the promotion of HF through an affordable housing program.  

The legal framework for repossession and loan collection for housing should be streamlined and the uncertainty on the foreclosure process reduced. This is one of the biggest constraints for the development of housing finance and the real estate business.  

The promotion of HF can help Africa generate additional economic growth  to the tune of 200 basis points per annum and can be one of the best ways to empower citizens to become active players  in the local economy.

Alassane Bâ is the Managing Director of Shelter Afrique since July 2009. Before joining Shelter Afrique he spent 18 years at the African Development Bank. His last position was Division Manager for Industries and Services at Private Sector Development. He contributed over many years to the growth of the private sector operations. He sat in the Board of Directors of Afreximbank and Pan African Infrastructure Fund and was member of Investment Committee of Emerging Capital Partners (ECP).

Towards a global reinsurance of poor producers’ risks

26.03.2012Michel Vaté

The way out of a crisis is always easier and faster provided there is a post-crisis scenario plan. In the current global crisis, Africa has a role to play: The continent has immediate and distant future emerging countries which will help boost global economic growth. But it also has a serious challenge: it is vulnerable as most of its producers are, and faced with too many risks against which they are helpless. Vulnerability or growth? It will be one or the other. For growth to prevail, Africa needs to be reinsured.  

A milestone has been achieved. While the spread of insurance has long been viewed as a future outcome of economic development, it is widely acknowledged that it could serve as a lever of development, especially with regard to primary risks that affect the capability of poor producers, at the bottom of the development process. The list of insurance "virtues" is indeed  considerable  - speed and transparency of victim compensation, mitigation of paralyzing impact of risk, protection of gains of past efforts, speedy restoration of the victim’s potential, increasing responsibility of the individual, reduction of credit risk, increased development aid efficiency. The facts are there - the spread of micro-insurance across the world proves that even on the poverty line, people are willing to voluntarily make an effort ensure themselves if over time, they find their interest.  

But there is a major obstacle in the way: An insurance system remains fragile if there are no reinsurance facilities to deal with exceptional claims (cost or frequency). Besides the "technical" advantage of strengthening the capacity of local insurance companies and making coverage of huge risks affordable, reinsurance also contributes greatly to development by freeing up capital for productive use, and by lowering the required return on capital given that it is generally less exposed to risk.  

But the two conditions for the emergence of reinsurance – available financial capacity, and the maturity of the local financial system - are lacking in the least developed countries. The crisis has further complicated the situation: added to the increasing needs due to the effects of the crisis is the increasingly difficult debt situation and increasingly scarce public funds for development aid.  

Given that reinsurance capacity is lacking at national level, it is necessary to look at the global level: this constitutes the objective of the Planet Ré Project. Various funding possibilities are available to replenish Planet Ré reserve: booting through public endowment, reinsurance premiums, issuance of Poverty bonds (securitized risk on the model of cat-bonds and weather derivatives), temporary and paid deposit of a tiny portion of international financial transactions before return to its owners ... excluding catastrophic hazard! Like poverty bonds, this simple exchange of risk - at no additional cost to the crisis that has hit global economy - would expose investors to random losses of a scope comparable to that of financial markets.    

Concretely, Planet Ré can be viewed from three main configurations, which may foreshadow a phased implementation: partial regional or thematic mechanism (food security, health, agricultural safety, climatic accidents, etc.), consortium with joint ultimate reinsurance capacity or specific institution. Whatever the configuration adopted, the specificity of Planet Ré is its founding principle (connecting local risks to the global financial system), under the protection of demanding specifications: in the genuine interest of the populations concerned, the specific context of low-income countries would be no excuse for any weakness in relation to actuarial rules, insurability criteria and, more generally, solvency standards that govern insurance activities. This is thus the only way that the challenge to put financial globalization at the service of the poor can be taken up.  

For more information, please access the full note here.

Emeritus Professor at the University of Lyon (IEP), former Dean of the Faculty of Economics, Lyon, associate researcher at the Thomas More Institute. Specialty: decision taking assistant, forecasting, risk analysis. He participated as an expert in the ILO/World Bank Social Re program, contributing to the Social Reinsurance collective work and several conferences (Geneva, Lyon, Washington, and San Francisco) on the limits of insurability in poor countries. He is the author of numerous books, articles and contributions among which is the Leçons d’économie politique (Economica), a reference document reprinted eight times. His Reflection titled: "Réassurer la planète (reinsuring the planet)" (Thomas More Institute, 2004-2011), advocated a global reinsurance to support development strategies. Conferences in Paris (FFSA),Rome (FAO), Quebec (ICMIF).

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