Microinsurance receives boost by new NBE directive

Insurers and Micro-Finance Institutions (MFIs) as per NBE’s Directive can both now fully be involved in the microinsurance business alongside micro-insurance institutions, at the capital of 10 million birr for comprehensive insurance services.
The ‘licensing, license renewal and product approval for microinsurance providers directive no. SMIB/3/2020’ that was issued by the National Bank of Ethiopia (NBE) has allowed the formation of microinsurance companies and also given a right to the mainstream insurers to run microinsurance businesses without separate licenses.
The directive allows MFIs to undertake the microinsurance business with a separate unit, with keen supervision by NBE.
The directive, article 6.1, allowed micro-insurers to provide all microinsurance products including weather index insurance, however the weather index product shall be subject to prior reinsurance treaty arrangements.
Companies that demand to run microinsurance should have a paid up capital of three million birr for life or long term insurance business and seven million birr for general insurance business. A company which demands to run both businesses must have a paid up capital of 10 million birr.
The directive stated that the microinsurance business unit of a microfinance institution must at all times maintain a financially sound position by holding assets in a separate microinsurance business unit fund to meet the minimum capital requirements set out in sub article 5.3.3, which states that the minimum paid up capital for life business as three million birr and 7 million birr for general business, or the minimum solvency requirements prescribed in the relevant directive for the microinsurance business whichever is greater.
The directive article 5, sub article 3.1, indicated that a microfinance institution may carry on credit life insurance to its loan clients without authorization from NBE to conduct its business.
Excluding credit life, MFIs shall establish a microinsurance business unit for the management and running of the microinsurance operation.
According to the directive article, 6 sub article 2.1, the maximum sum insured per risk for microinsurance products (life and general) shall not exceed one percent of the paid up capital of the life or general microinsurance business.
Belay Tulu, Director of Insurance Supervision Directorate at NBE, clarified that the maximum one percent of the paid up capital is that related to the amount stated for microinsurance.
The insurance business in the country is very limited and its contribution to the GDP is similarly small.
There have been several pilot microinsurances whose application have spanned over 15 years but it had not addressed the massive population. “Now the directive will help to scale up the tests,” Belay said.
The microinsurance directive is stated as a support to realize the movable asset loan. The movable collateral has targets to address those who are not included on the formal access to finance schemes.
The movable collateral registry directive indicated that five percent of the annual loan disbursement of banks to be allocated to the agriculture sector, which mainly focused on micro, small and medium enterprises and cooperatives.
The recently issued namely, ‘codification, valuation and registration of movable properties as collateral directive no. MCR/02/2020’ is expected to implement the highly anticipated loan scheme.
“The directive may simplify the operation and minimize the potential risks in the lending process for banks thus creating easy and simple access to credit,” Temesgen Zeleke, Director of Financial Inclusion Secretariat at NBE said on the discussion with the representatives of financial institutions on the meeting held on the 9th of September at the headquarters of NBE.
On the codification process both serial number and non-serial are included, while valuation is managed by relevant government bodies and affiliates like Ethiopian Commodities Exchange.
“When the new loan scheme commences those who have saving on informal system would come to the formal saving that means at banks,” the Director of Financial Inclusion Secretariat said.
“It may improve the resources at financial institutions that would be instrumental for loans on the new scheme,” the NBE official added.
The new directive will present an opportunity for equitable financial scheme. “Currently banks are collecting savings from rural areas but their financing for the stated locations is very low. Therefore, the new directive will help to address all parts of the society in terms of financing,” Temesgen said.

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