Using Insurance to manage some of the risks confronted by Microfinance & Savings and Loans entities.

Risk management is central to modern business management. Companies are constantly faced with risks that threaten their survival. For an entity like a microfinance or savings and loans company, there are certain fundamental risks that confronts the business every day. These risks can be broadly categorised into the following: 

⦁ Financial Risks

⦁ Operational Risks and

⦁ Strategic Risks.  

Financial Risks can further be divided into Credit, Liquidity and Marketing Risks. Operational Risks can also be divided into Transaction, Fraud (Integrity) and Legal and Compliance Risks whereas Strategic risks can be broken down into Government and External Business Risks.

For the purpose of this write up, the focus area will be largely Credit, Liquidity, Fraud (Integrity) as well as Legal and Compliance Risks. Some additional areas that will also be looked at include security for employers (owners) and employees of businesses, security for property such as buildings and other office logistics.

Credit Risks

Microfinance Institutions (MFIs) and Savings and Loans Institutions (SLIs) are in a business of mobilising cash from potential investors for onward lending to the public at an interest rate. The major risk faced in giving out credit is the risk of default which is the debtor not being able to pay back the loan collected. An inability to pay back a loan may not necessarily be due to a lack of willingness to pay or projections and expectations not materializing. There are times when death or permanent disability on the part of the debtor is the underlying cause of non-payment.

There are cases where businesses use collateral as security for the loans collected but that in itself comes with certain unforeseen challenges. In most Ghanaian traditions, it is customarily improper or unethical to touch the belongings of a deceased person until after about a year. Some properties that are used for collateral may even end up in dispute and thus delay the recovery process and by extension the capital of the business.

Liquidity Risks

Liquidity risk is to a large extent the inability of MFIs and SLIs to meet current cash obligations. The unavailability of cash can also affect growth and expansion needs. The interests of key stakeholders such as owners and customers are thus affected. It should however be noted that the issue of credit risk largely contributes to liquidity risks. Having a lot of unpaid loans or non-performing loans on the books negatively affects a business’s cash position.

Fraud (Integrity) Risks

Many MFIs and SLIs deal with customers whose repayment of loans are on a daily basis and redeemed largely through cash. The cash collections and loan repayments are handled by officers of these institutions on the field. Monies collected by these field officers sometimes don’t end up in the company’s bank account as anticipated. Simply put, some field officers actually bolt with the monies collected hence affecting liquidity as discussed earlier. There are some instances where the issue may not be fraudulent but funds are lost as a result of attacks on these officers by criminals.

Legal and Compliance Risks

MFIs and SLIs are regulated entities and are bound by certain obligations. One of these obligations is the minimum level of capital to keep to continue in business. Compliance risk arises out of violations or non-conformance of MFIs with laws, rules, and regulations, prescribed practices or ethical standards.  A business that fails to conform to compliance requirements risks heavy sanctions which ranges from fines and lawsuits to the voiding of contracts, loss of reputation or business opportunities, or shut-down (withdrawal of licenses) by the regulatory authorities. If a business as a result of non-performing loans fails to meet the minimum capital level required for its operations, it risks a possible shut down by the regulator.

Employee Security Risks

The most valuable asset of every employer is the human capital (employees). As companies make new demands on their workers to increase productivity, employees also expect their employers to enhance their employees’ benefits for their well-being and that of their families. Employees are therefore looking for companies who do not only pay good salaries but have adequate and comprehensive benefits that extend beyond the coverage of traditional risks at the workplace to help secure their future.

Other Risks

Other risks that are worth giving attention to are buildings, offices, furniture and other office logistics that these businesses operate with. There are potential risks such as fire damage, flood damage, motor accidents, etc. that upon occurrence can hugely cost a business to restore full business functionalities. 

It is largely the case also that most of these MFIs and SLIs receive substantial loans from investors and repay over a period without the provider of the funds necessarily being a shareholder of the business. The basic contract may be that of loans advanced and a promise to payback after some period with an agreed interest. Businesses funded like this are also faced with a risk of collapse should the debtor pass on without the necessary risk mitigation arrangements in place. Shareholders may risk losing ownership of the business to the lender.

As people in the financial sector, the public can rely on advice and recommendations made by professionals in these institutions to carry out investments. Since the market in which we operate is in itself another area of risk, it is possible that an advice rendered may not yield the desired outcomes. Some clients may not take kindly to losses and may sue the officer from who they received advice on the premise that they relied upon their advice. This can result in huge financial losses to businesses depending on the outcome of such legal suits.

Dealing with the Aforementioned Risks

These and many more are risks that confront businesses on a daily basis. The fortunate thing is that various mitigation avenues are available in the financial space to give the required peace of mind to business owners at very affordable rates.

One of such risk mitigation strategies is the use of INSURANCE. The various risks discussed and how insurance can be used as a tool to deal with them are as discussed below:

Credit Risks – MFIs and SLIs can insure the loans that they give out to the public such that should the debtor die or become permanently disabled, the outstanding loan balance will be borne by the Insurance or Microinsurance Company that insured the loan. These policies are referred to us Credit Life or Loan Protection policies. It must however be mentioned that such insurance arrangements do not cater for default in payment when the debtor is alive and able.

Fraud (Integrity) Risks – An insurance policy referred to as a Fidelity Guarantee Policy can be used to address this risk. A Fidelity Guarantee insurance is an insurance policy designed to indemnify (restore) the Insured (the employer) for the loss of money or property sustained as a direct result of acts of fraud, theft or dishonesty by an employee in the course of employment. An MFI or an SLI can take up this policy on the employees to safeguard this particular risk.

Employee Security Risks – Various comprehensive insurance policies are offered by life insurance companies to adequately deal with this risk. Multiples of salaries of employees can be insured for the benefit of the families that depend on them in case of the employees’ death, dread disease or permanent disability. In the case of accidents, medical bills are catered for and an employer can be reimbursed with the salaries paid an employee whilst the employee takes time off to recuperate. The employer therefore does not have to lose double with respect to productivity and income loss.

Other risks – An asset all risks policy from a General Business Insurance Company can help a company protect its property against the risk of fire and flood damage. There are instances where although an employer gets paid for the assets lost, incomes are lost because the business takes time to reorganize and get back into operations. A Business Interruption policy would help in that regard by paying for loss of revenues. Motor vehicles are also adequately catered for by insurance companies as readers may already be aware of this policy.

Where the business largely revolves around a key person or persons of which death to any such persons could result in financial losses to the business or face a possible shut down or take over as a result of some loan that has to be settled, the lives of such person(s) can be insured to the tune of the anticipated loss the business will suffer in case the risk materializes. This ensures business continuity and peace of mind to all stakeholders.

In the area of advice that was relied upon by an investor that turns out bad and results in litigation, a Professional Indemnity policy from a General Insurer will help deal with this risk. It is therefore necessary that professionals in the business who offer advice to the investing public get themselves adequately covered to shift any potential awards arising out of suits to the insurance company.

There is potentially the case where some of the risk mentioned above would occur at the premise of the debtor and not the lender and hence renders the debtor unable to pay. In such cases the lender of the funds is most likely to attach a human face to the difficulty the debtor’s business is confronted with and extend the repayment period. This also locks up capital for the business.

It therefore necessary for MFIs and CFIs to impress upon their business partners or customers to protect their businesses with the appropriate insurances to ensure that they can have business continuity when disaster strikes and be able to meet their loan repayment obligations. If possible MFIs and SLIs can make the possession of an insurance policy a pre-requisite for the acquisition of some loans.

Conclusion

In the foregoing discussions, it is evident that insurance can play a great role in protecting the interest of MFIs and SLIs. However some of the policies mentioned can be gotten from Life Insurance Companies and others General Insurance Companies. This may inconvenience a client in an attempt to acquire the relevant insurance policies for his or her business.

Some insurance entities however have created a one-stop shop for all this policies and thus bring convenience and flexibility to business people. 

One such one-stop shop is the Star Insurance Group which brings together Star Assurance (General Business Insurance), StarLife Assurance (Life Insurance) and Star Microinsurance (Microinsurance). Other reputable entities are also available to assist businesses to get the right protection for their businesses.

As the business world gets more sophisticated, it is imperative that businesses get even more sophisticated to keep pace with the business environment or else risk being left behind. Businesses must endeavour to use some of these opportunities available in the market place to their advantage and not keep undesired risks on their books.

   

(Write-up by the Star Insurance Group)