[Guest Post]: Financial Literacy and Microfinance – New Research

Editor’s Note: Aparna Dalal works with the Financial Access Initiative, a research consortium between New York University, Harvard, Yale, and Innovations for Poverty Action. FAI is focused on finding answers to how financial services can better meet the needs of poor households. FAI aims to provide rigorous research on the impacts of financial access and on innovative ways to improve access. Aparna previously guest posted on health microinsurance models.

Last week I attended a conference on cutting-edge research in microfinance.  Philanthropy Action live-blog presents in-depth coverage of the entire conference (see posts on Oct 17-18).  Many projects were based in India covering areas like credit, savings, insurance, product design and impact.

One panel revolved around financial literacy and its impact on savings.  With everyone, from the World Bank, to Citigroup, to Freedom from Hunger to IFC talking about financial literacy, it is important to understand what financial literacy really means. Does financial literacy mean teaching someone how to create a budget?  Does it mean teaching someone how to cut back on unnecessary expenses?  Does it mean teaching someone how to compare an interest rate and an APR?  Does it mean teaching someone how to read a rainfall gauge to determine their insurance payout?

The idea of whether the poor need financial literacy has generated considerable debate within the industry.  Muhammad Yunus (and others) argue that poor are good money managers with great financial acumen.  Others argue that the past three decades of experience suggest that education programs could play an important role in helping households better manage their financial lives.  Persistent borrowing, low saving, dealing with frequent emergencies are all indicators of poor financial planning skills – skills that could be improved through well-designed education programs.

It is difficult to tease out the exact effect of these programs, which makes this type of research all the more challenging.  Further, the diverse nature of the programs (as indicated in the questions above) makes understanding the components and structures of the programs critical.

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[Guest Post]: Health Microinsurance Models

Editor’s Note: Aparna Dalal works with the Financial Access Initiative, a research consortium between New York University, Harvard, Yale, and Innovations for Poverty Action. FAI is focused on finding answers to how financial services can better meet the needs of poor households. FAI aims to provide rigorous research on the impacts of financial access and on innovative ways to improve access.

In India, it is claimed that 35 million households fall below the poverty line every year because of a health shock – consequently, health (micro)insurance is considered the most important protection mechanism for low income households that are particularly susceptible to health shocks because of their low saving buffer and poor living conditions. Unfortunately, health insurance is also considered the most complex type of insurance to administer because traditional economic problems of moral hazard and adverse selection are compounded by the need for a quality, reliable health service provider. The dominant health microinsurance delivery approach in India (partly due to regulation) is the partner-agent model. The idea is for mainstream insurance companies (like ICICI Lombard) to partner with microfinance institutions (MFIs) and NGOs. The insurance companies design the products and bear the actuarial risks while the NGOs and MFIs act as the delivery channel and earn a commission for their effort.

An alternate approach is community-based insurance. On a recent trip to India, I met two institutions implementing distinct community-based insurance models. Micro Insurance Academy (MIA), a Delhi-based institution, has developed a tool called CHAT (Choosing Healthplans Together) which allows communities to design their own insurance packages by involving them during the product design phase. Through CHAT community members can understand the trade-offs between covering illnesses within the plan and the associated costs. Uplift , a Pune-based association of organizations, involves the community differently. In their model, the insurance product is pre-determined and standardized across communities. Community involvement occurs at the claims settlement stage where community representatives (and not the insurance company) decide on the payout for each claim during a monthly meeting. Both models present interesting (and, thus far, unanswered) questions around transaction costs, client satisfaction, and scalability. But for a sector like health microinsurance, where the need and demand is substantial, diverse approaches should always be welcome.