Insuring microcredit against HIV, AIDS in South Africa

The social impact of the five million people already living with HIV/AIDS in South Africa will be enormous. This research paper investigates the continued access to credit for families that are at high risk of being infected with HIV: Credit providers typically exclude possible HIV-positive customers or substantially increase the risk premium in the expectation that HIV will progressively impair the ability of these customers to work and therefore their ability to repay the loan, which would finally lead to loan losses. Families at risk are mostly low-income families, often with no formal employment. Maintaining their access to finance would give them the opportunity to retain an active role in the economy and prevent destitution or improve their economic situation. Low-income families are served by so-called microfinance institutions (MFIs) that specialise in providing small amounts of credit to people who do not have access to formal financial institutions. In order to continue lending to the target group at affordable rates, MFIs need a safeguard mechanism against HIV/AIDS-related loan losses. This publication develops a microinsurance concept as a hedging mechanism. Different product designs are analysed, resulting in a concrete product proposal. The exact risk costs are calculated in order to determine the appropriate pricing for the product. The analysis concludes that such a microinsurance product is a viable mechanisms to reduce the risk for any single institution by pooling the risks of many MFIs. As a last step, the study analyses the practical implementation of this product.