Grassroots Social Security in Asia: Mutual Aid, Microinsurance and Social Welfare

GRASSROOTS SOCIAL SECURITY IN ASIA Edited by James Midgley and Mitsuhiko Hosaka

Grassroots Social Security in Asia Mutual aid, microinsurance and social welfare

Edited by James Midgley and Mitsuhiko Hosaka

ISBN 978-0-415-49306-2

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Routledge Research On Public and Social Policy in Asia

Grassroots Social Security in Asia

Grassroots Social Security in Asia investigates the role of mutual associations in providing income protection to low-income people in Asia and in particular the region’s developing countries. Historically, these associations have consisted of small groups of people with common interests who save regularly to support, maintain and supplement their incomes. Members make regular contributions to a communal fund which is used to provide income protection when they experience financial hardship. This book is the first to comprehensively document the activities of mutual associations and their microinsurance programmes in Asia where these programmes are especially well developed. It provides a number of important case studies that offer detailed information about mutual associations in different parts of the region, covering India, Sri Lanka, Thailand, Mongolia, Indonesia and the Philippines. The case studies provide important insights into the potential of mutual associations to offer effective income protection and how their activities can contribute to the formulation of comprehensive and effective grassroots social security strategies in the developing world that make a tangible contribution to the goal of poverty eradication and the improvement of standards of living. This book will be of interest to policy-makers, academics and students in the fields of Asian studies, social security studies and development studies. James Midgley is the Harry and Riva Specht Professor of Public Social Services at the School of Social Welfare at the University of California, Berkeley, USA. Mitsuhiko Hosaka is Professor and Dean of the Graduate School of International Social Development, Nihon Fukushi University in Japan.

Routledge Research on Public and Social Policy in Asia Edited by M Ramesh National University of Singapore

1. Ultra-Low Fertility in Pacific Asia Trends, causes and policy dilemmas Edited by Gavin Jones, Paulin Tay-Straughan and Angelique Chan 2. Transforming Asian Governance Rethinking assumptions, challenging practices Edited by M Ramesh and Scott Fritzen 3. Social Policy and Poverty in East Asia The role of social security Edited by James Midgley and Kwong-leung Tang 4. Grassroots Social Security in Asia Mutual aid, microinsurance and social welfare Edited by James Midgley and Mitsuhiko Hosaka

Grassroots Social Security in Asia Mutual aid, microinsurance and social welfare

Edited by James Midgley and Mitsuhiko Hosaka

First published 2011 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Avenue, New York, NY10016 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2011 Editorial selection and matter, James Midgley and Mitsuhiko Hosaka; individual chapters, the contributors. The right of James Midgley and Mitsuhiko Hosaka to be identified as editors of this work has been asserted by them in accordance with the Copyright, Designs and Patent Act 1988. Typeset in Times New Roman by Keystroke, Station Road, Codsall, Wolverhampton Printed and bound in Great Britain by the MPG Books Group, UK All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Grassroots social security in Asia : mutual aid, microinsurance and social welfare / edited by James Midgley and Mitsuhiko Hosaka. p. cm. — (Routledge research on public and social policy in Asia ; 4) Includes bibliographical references and index. Social security—Asia. 2. Poor families—Services for—Asia. 3. Social security—Asia—Case studies. 4. Poor families—Services for—Asia—Case studies. 5. Asia—Social policy. I. Midgley, James. II. Hosaka, Mitsuhiko. HD7211.85.G73 2011 361.95—dc22 2010031554 ISBN 978–0–415–49306–2 (hbk) ISBN 978–0–203–83178–6 (ebk)

Contents

Notes on contributors Preface Introduction

vii xi 1

MITSUHIKO HOSAKA AND JAMES MIDGLEY

PART I

The issues

13

1

15

Understanding mutual aid JAMES MIDGLEY

2

Challenges to mutual aid: the microinsurance response

29

JAMES MIDGLEY

PART II

Case studies of microinsurance in Asia 3

An analysis of India’s social protection system for low-income populations

45

47

MARIKO OKAMOTO

4

Formalizing grassroots social security: the experience of CARD in the Philippines

64

JAIME ARISTOTLE B. ALIP AND TAKAYOSHI AMENOMORI

5

Investment-based grassroots social security: the case of the Women’s Co-op in Sri Lanka MITSUHIKO HOSAKA AND NANDASIRI GAMAGE

79

vi Contents

6

Social security through community welfare funds in Thailand

95

PANTHIP PETCHMARK, SOMSOOK BOONYABANCHA AND MITSUHIKO HOSAKA

7

Safety net measures for Mongolian herders: coping with risks in a transition economy

110

MARIKO OKAMOTO

8

Grassroots social security in Indonesia: the role of Islamic associations

123

SIROJUDIN AND JAMES MIDGLEY

PART III

Policy implications 9

Conclusion: mutual aid, microinsurance and social security for all

137

139

MITSUHIKO HOSAKA AND JAMES MIDGLEY

Index

150

Notes on contributors

Jaime Aristotle B.Alip is the Founder and Managing Director of the Center for Agriculture and Rural Development Mutually Reinforcing Institutions (CARD MRI), and the 2008 Ramon Magsaysay Awardee for Public Service. He is an alumnus of Harvard Business School, and obtained his doctorate degree in organizational development from the Southeast Asia Interdisciplinary Development Institute, the Philippines. He was an adjunct faculty of the School of Community Economic Development, Southern New Hampshire University, USA (2008 to 2010). He has served in various key positions in the Philippine government including Under-Secretary of the Department of Social Welfare and Development (2002 to 2003). Having extensive international experience in the field of microfinance and rural development, he received the Medal of Honor from the Vietnam Women’s Union in 1995, has recently been elected a member of the International Board of Directors of Oikocredit and sits as an adviser in Grameen Foundation, USA. Takayoshi Amenomori is a Professor at the Nihon Fukushi University. He is Dean of the Department of Distance Education and also teaches at the Graduate School of International Social Development at the same university. He obtained his MA in the field of sociology of education from Osaka University, and worked for several non-profit organizations in the field of international exchange and development cooperation before joining the Nihon Fukushi University in 2001. His research interests include the role of non-profit organizations in society, the effectiveness and scope of microfinance and microinsurance, as well as the organizational development of NGOs. Somsook Boonyabancha has been Secretary General of the Asian Coalition for Housing Rights (ACHR), a coalition of key organizations working for the urban poor in housing development, since it was established in 1988. She studied architecture at Chulalongkorn University in Thailand and underwent training on housing and urban planning in Copenhagen in the late 1970s. She has been working extensively on urban housing and slum upgrading in Thailand and in countries of Asia for the past 30 years, and taught as visiting lecturer in various universities in Asia, Europe and USA. In 1992, she became Director of the newly established Urban Community Development Office of the government, and then

viii Notes on contributors served as Director of its descendant, the Community Organizations Development Institute, until 2009. At present, she is coordinating a massive regional program called the Asian Coalition for Community Action under ACHR to support community-led, city-wide urban improvement in 200 Asian cities. Nandasiri Gamage is the Founder of the Sri Lanka Women’s Development Services Cooperative Society Ltd, or Women’s Co-op, which was more popularly known as the Women’s Bank for nearly 20 years. His current position is General Manager and Financial and Institutional Adviser with Women’s Co-op. He read for a special degree in banking at Peradeniya University in the late 1960s but was unable to complete it, due to his involvement in the 1971 insurrection. He has since been a voluntary community development worker, while also serving as a member of the PO-NGO Advisory Committee of the Janasaviya Trust Fund, a major poverty-alleviation programme of the government in the early 1990s. Currently he is a member of the Advisory Committee for Urban Housing of the Urban Development Authority, and chairs a donor-assisted government project for livelihood development of tsunami-affected communities in Sri Lanka. Mitsuhiko Hosaka is Professor and Dean of the Graduate School of International Social Development, Nihon Fukushi University, Japan, and serves as Director of the University’s Asian Research Center for Social Well-being and Development that promotes region-wide joint research on poverty alleviation and community revitalization. After studying urban planning at the Graduate School of Tokyo University, he worked with several UN agencies for nearly 20 years in the field of human settlement development. He was also Visiting Scholar at Ohio State University before joining Nihon Fukushi in 1995. One of the founding members of Asian Coalition for Housing Rights, he is currently an Independent Assessor of the World Bank’s Cities Alliance Project and a member of the Advisory Group on Forced Evictions with UN-Habitat. James Midgley is the Harry and Riva Specht Professor of Public Social Services and Dean Emeritus of the School of Social Welfare, University of California, Berkeley. He was previously at Louisiana State University where he served as Dean of the School of Social Work and subsequently as an Associate Vice Chancellor. Prior to LSU, he taught at the London School of Economics and the University of Cape Town. He has undertaken research and published widely on issues of social policy, social development and international social welfare. His most recent books include Social Security, the Economy and Development, Palgrave, 2008 (editor with Kwong-leung Tang) and The Handbook of Social Policy, Sage, 2009 (editor with Michelle Livermore); Social Security and Poverty in East Asia, Routledge, 2010 (editor with Kwong-leung Tang), and Social Work and Social Development, Oxford University Press, 2010 (editor with Amy Conley). He is an Honorary Professor at the Hong Kong Polytechnic University, Nihon Fukishi University in Japan and the University of Johannesburg, South Africa. Mariko Okamoto is Professor of Nihon Fukushi University and teaches at its Graduate School of International Social Development. She obtained her Master’s

Notes on contributors ix degree in economics from Osaka City University. She worked for some time in a NGO promoting international cooperation at the grassroots level in Asia, and established the Oikocredit Japan, before joining the University in 2002. Her research interests lie in the microeconomic analysis of microfinance and microinsurance for poverty alleviation. Panthip Petchmark studied social development at the Prince of Songkhla University, Thailand, and obtained a Master’s degree in social work (community development) from Thammasat University. After working as a social worker for eight years in the Social Welfare Department of the Bangkok Metropolitan Administration, she joined the Urban Community Development Office when it was established in 1992. She continued on its staff after the organization was transformed into the Community Organizations Development Institute, and serves currently as its Assistant Director. She has been engaged in a number of evaluative research studies on urban and rural community projects. Sirojudin is a PhD candidate at the School of Social Welfare, University of California, Berkeley. Under the supervision and mentorship of Professor James Midgley, his dissertation research examines the social protection performance of a microinsurance programme for the informal sector workers in Indonesia. Previously he obtained a Master’s degree in social work from McGill University, Canada; taught and helped establish a social welfare programme at the State Islamic University in Jakarta, Indonesia; and served as a social policy consultant for several organizations such as the Indonesian Ministry of Social Welfare, ADB/Japan Fund for Poverty Reduction (JFPR) project in Indonesia and the United Nations Children’s Fund (UNICEF).

Preface

The limitations of statutory social security schemes in developing countries have long been recognized. Although introduced with the best intentions, these schemes have failed to extend social protection to the majority of the population. Faced with perennial risks that challenge their livelihoods, the excluded majority rely extensively on non-formal systems of support, including family, kin and community networks and the charitable activities of temples, mosques and churches to manage these risks or to improve their well-being. They also create and utilize mutual aid associations that pool resources to pay benefits in times of need, and facilitate savings and the accumulation of capital. Although it was widely believed that the non-formal social protection system would wither away as government programmes gradually expanded, access to statutory social security schemes remains limited and non-formal practices are still widely used. While social security coverage has improved in many parts of the world, the goal of providing social protection to all has not been reached. Since most governments have introduced statutory social security schemes, and often subsidize these schemes, they have an obligation to support the non-formal system in general and mutual aid associations in particular, many of which are evolving into more formal organizations. Government resources should be used to enhance the effectiveness of the non-formal system and steps should be taken to integrate the statutory and non-formal systems so that social protection may be extended to many more people. This argument has recently been restated as the campaign to extend social security coverage to the excluded majority gathers pace. The potential of harnessing the social protection role of mutual aid associations is also being recognized, particularly as many are entering into partnerships with nongovernmental organizations, as well as commercial insurance providers. The emergence of microinsurance, as this development is known, is attracting a great deal of attention, particularly from those who believe that microinsurance complements the financial innovations, such as microcredit, that have emerged in many parts of the developing world. From this perspective, it is argued that microinsurance should be supported to form an integral part of the financial lives of poor people. However, this book takes a somewhat different position, contending that the emergence of microinsurance is a potentially valuable social protection mechanism that deserves the support of governments, foundations and international

xii Preface donors. As efforts to extend statutory social protection are being redoubled, mutual aid and microinsurance can play a vital role in social protection. The chapters in this book examine various aspects of this argument. In addition to a discussion of mutual aid and microinsurance, the book contains country case studies from Asia that show what is being done through grassroots social security initiatives to extend social protection to the poor. Several of the chapters are based on papers prepared for a project organized by the Asian Research Center for Social Well-being and Development of Nihon Fukushi University, Japan. The Center’s organizational and financial support is gratefully acknowledged. We thank the staff of the Center and the Graduate School of International Social Development at Nihon Fukushi University for providing an opportunity for scholars, practitioners and administrators to discuss mutual aid and microinsurance developments in different Asian countries. In particular, we thank the contributors to this book for their participation and commitment to the project. They worked hard to deliver their manuscripts on time and were receptive to editorial recommendations. We are equally grateful to those who provided information about the grassroots microinsurance projects discussed in the country case study chapters of this book. They are too many to list here by name but include the members, participants and leaders of these projects who willingly shared their experiences, assisted in interviews and data collection, and commented and advised the chapter authors. Thanks also to Rayna Rusenko for her thorough and detailed editorial assistance. Many thanks to Meghan Morris at Berkeley who provided invaluable assistance with the preparation of the final manuscript. We also thank Professor Toshihiro Yogo, former head of the Graduate School of International Social Development, for his encouragement and support. We also wish to recognize the influence of many scholars who have contributed to a better understanding of grassroots social security in the developing world. In particular, we pay tribute to the pioneering scholarship of Franz and Keebet von Benda-Beckmann who played a vital role in promoting the study of grassroots social protection. Scholars at the Max Plank Institute for International Social Law in Munich, Germany, including Hans Zacher, Ulrich Becker, Bernd Schulte and Barbara Darimont, have also contributed significantly to the field, as has Wounter van Ginneken of the International Labour Office (ILO) who has tirelessly advocated for the integration of non-formal and statutory social protection. We also wish to thank Professor M. Ramesh, editor of the Routledge Research on Public and Social Policy in Asia series, who endorsed the proposal and provided helpful advice. We are also grateful to Stephanie Rogers at Routledge who enthusiastically supported the idea for a book on grassroots social security in Asia and provided ongoing assistance and encouragement. We thank Sarah Enticknap, Emily Davies and Ed Needle for the help they have given us throughout the editorial and production process. We thank Ann King for her efficient copy editing, and Maggie Lindsey-Jones, Emma Wood and Jo Aston for so diligently managing the book’s production. James Midgley Mitsuhiko Hosaka University of California, Berkeley Nihon Fukushi University

Introduction Mitsuhiko Hosaka and James Midgley

In the struggle to provide for themselves and their families, human beings have faced perpetual adversities that have reduced, interrupted or terminated their income or otherwise depleted their assets. These adversities are also known as risks, contingencies, shocks, vulnerabilities or insecurities. Among the most familiar are harmful physical conditions such as sickness, disability, infirmity or death which have particularly serious consequences when they affect those who are primarily responsible for generating household income. Wider adversities such as floods, crop failure, hurricanes, fires and mass violence also have a serious impact upon household incomes and family well-being. In addition, the risks facing many people in the Global South are exacerbated by the fact that they live in conditions of poverty, malnutrition, ill-health, ignorance and oppression. Today, the challenge of meeting the contingencies of everyday life continues as literally billions of poor people around the world deal as best they can with insecurity. As in the past, the challenge of coping with insecurity is not equally shared. While those with high incomes, wealth and power are able to cope, the poor continue to be exposed to massive vulnerabilities. However, unlike previous historical periods, many more people now have incomes that exceed their basic survival needs. With industrialization and rapid economic growth, incomes in many countries have risen significantly. In the Western nations, rising incomes and the accumulation of assets have not only improved the quality of people’s lives but have cushioned them from unexpected shocks. In addition, they benefit from commercial insurance and governmental social security schemes that maintain income when contingencies arise. These schemes also supplement the incomes of poor families who are disproportionately exposed to risk. In the Global South, on the other hand, large numbers of people live in poverty and do not have savings or discretionary incomes. Nor do they have access to commercial insurance and government social security schemes. Generally, the task of managing risk falls upon families and particularly on adult family members who are able to work. Most poor families seek to diversify their incomes, save small amounts of cash or acquire assets that will better prepare them to respond to crises. In addition, many have access to a complex nexus of cooperative practices and institutions that help them cope with adversity. Many rely on the institutions of support and mutual obligation that have emerged over the centuries. These

2 Mitsuhiko Hosaka and James Midgley institutions, which are legitimated by custom and cultural tradition, comprise what is often known in the academic literature as the ‘informal’ or ‘non-formal’ social security system (Maes, 2003; Midgley, 1984; von Benda-Beckmann and Kirsch, 1999). While the non-formal system is to be found in all societies, it is particularly strong in the Global South. Typically, non-formal social security institutions include family obligations to nurture, support and care for their members as well as the obligation to help members of the extended kin when they experience hardship. Family and kin obligations are accompanied by wider community support networks and cooperative activities that facilitate a variety of household and community tasks. These networks are usually concentrated among neighbours who are often related to each other but they may also extend to the wider community. For example, local people often provide their labour and expertise to construct communal facilities or share crop storage facilities or assist each other with harvesting. The charitable activities of temples, mosques and churches also form an integral part of the non-formal system, and these activities are usually legitimated by wider religious injunctions to show compassion and help those in need. Mutual aid is another institutionalized non-formal social protection mechanism. In the rural areas of developing countries, mutual aid may take the form of communal grain storage or helping neighbours with harvesting, participating in communal forestry or sharing livestock for breeding purpose. In the urban areas, it may involve the construction of facilities, engaging in cooperative business ventures or providing support to rural migrants. In addition to promoting income protection, mutual aid makes an important contribution to maintaining cultural norms of reciprocity which have wider implications for social integration and solidarity. Mutual aid activities and the cultural obligations that support them are very old indeed. It is widely believed today that the first human beings lived in small nurturing groups that met basic survival needs and provided a degree of protection against adversity. This conclusion is supported by the archaeological evidence and contemporary ethnographic studies of hunter-gatherer societies. Formative social thinkers in the seventeenth and eighteenth centuries also speculated on the nature of cooperative behaviour in early human societies, but they offered different opinions on the nature of mutual aid. As is well known, the Hobbesian claim that the first human beings subsisted in a state of perennial conflict was challenged by Rousseau who believed that they lived solitary but peaceful lives. Later romantics emphasized what they believe to be the inherent tendency of traditional communities to live communally and in accord with nature, but this view was in turn undermined by the popularity of Darwinian ideas in the nineteenth century which was used to justify competition, social inequality and the subjugation of colonized people by the European imperial powers. Early anthropological research tended to support the natural sociability thesis, although anthropologists were not immune from prevailing prejudices, using terms such as ‘savages’ and ‘barbarians’ to caricature the peoples they studied. It was at this time that the Russian Nobleman Peter Kropotkin (1902) offered one of the first systematic accounts of mutual aid. Living in exile in London in the

Introduction 3 late nineteenth century, Kropotkin was appalled by the popularity of Social Darwinism and its racist overtones. Drawing on volumes of previously published biological, anthropological and historical research, as well as his own observations, he restated the Aristotelian contention that human beings are social creatures by natural disposition. He rejected the crass use of Darwin’s research to legitimate conflict and oppression, and claimed that the human proclivity to cooperate was, like that of other social animals, biologically determined. However, Kropotkin also recognized the propensity for conflict in human societies, and drew attention to the ongoing tension between cooperation, competition and conflict. However, echoing the social contract theorists, he concluded optimistically that human beings are capable of developing institutions that foster peaceful cooperation, compassion and mutual aid. Kropotkin’s view that human beings can and do exercise agency to promote cooperative societies has been a perennial theme in accounts of the history of mutual aid. These accounts claim that human beings have historically utilized cooperative systems of support. It has also been argued that cooperation is biologically determined and may be found among many animal species. A recent restatement of this idea comes from de Waal (2009), a primatologist who believes that altruism is a natural inborn tendency in many mammals including humans. Selfishness, greed and the pursuit of personal interest is, he contends, contrary to human nature. However, most scholars emphasize the role of sociological factors in the genesis of mutual aid, arguing that systems of support are embedded in networks of social relationships and reinforced by cultural and religious norms. These networks transcend the short-term, contractual relations typified by market transactions and reflect wider social and cultural obligations. As was noted earlier, they are manifested in familial and kin relationships, community networks, the charitable activities of religious bodies and in associations that are formed at the grassroots level to promote savings or to help their members meet the contingencies that undermine their well-being. Mutual aid also characterizes the activities of groups or associations of people who contribute resources to a common pool which is then used to meet income needs. These associations are very common in the Global South and, although they operate in complex ways and have different functions, they collect regular monetary contributions from their members and provide benefits according to agreed rules and procedures. Many mutual aid associations have a social protection function. For example, they maintain income during times of illness or help families meet the costs of medical care, or help them pay for funerals which can be elaborate and expensive. They are an important part of the non-formal social security system in the developing world. Other mutual aid associations are designed primarily to facilitate savings, while others specialize in providing credit. However, even these associations usually provide some degree of income protection to their members. Traditionally, mutual aid was rooted in spatial communities. For example, during the pre-modern Edo period in Japan, self-governing rural communities were encouraged to care for needy community members and were required to collect from local farmers a defined contribution of rice which was kept in a village store

4 Mitsuhiko Hosaka and James Midgley known as Gohgura. In time of famine, droughts or other crises, the stored rice was distributed to the poorest members of the community. It was also given out in the form of low-interest loans. While benefit societies comprising members who contributed regularly to a pooled fund were common within villages, they were governed by the whole village community. Similarly, in Britain, the friendly societies evolved out of informal gatherings of neighbours, friends and relatives at local pubs where the practice of collecting contributions and then periodically dividing the proceeds was well established by the seventeenth century. Originally known as ‘dividing’ societies, they are now known as rotating savings and credit associations (or ROSCAs). Eventually, these groups evolved into the friendly societies which had a more explicit welfare function. These societies are now usually known as benefit associations. They played a major role in meeting income protection needs among poor people, particularly in the rapidly expanding industrial cities of the nineteenth century (Kidd, 1999). However, as industrialization and urbanization advanced, statutory poor relief measures replaced mutual aid, and some of the functions of the friendly societies were absorbed by cooperative banks and formal mutual insurance firms. Despite modernization and industrial development, mutual aid associations remain active in the developing countries today, particularly at the local community level and they play an important role in providing assistance to needy members. This is especially the case in rural communities but also in the urban areas where collective protection is often a part of the survival strategies used by people living in informal settlements. Today, mutual aid is characterized by conscious self-organizing efforts. In recent times, with increasingly unstable economic circumstances, poor people face serious risks and uncertainties, and mutual aid is often a major source of assistance, augmenting family, kin and community support networks and religious and charitable provisions.

Mutual aid associations and microinsurance Although the generic term ‘mutual aid association’ is widely used today, there is actually no agreement about what these associations should be called. Other frequently used terms include ‘benefit associations’, ‘savings cooperatives’ or ‘savings clubs’. Sometimes they are known by the specialized names that refer to their primary function, such as ‘burial or funeral societies’, ‘rotating savings and credit associations’ (ROSCAs) and ‘accumulating savings and credit associations’ (ASCAs). Mutual aid associations that help their members during times of sickness, disability, unemployment or death are, as noted earlier, usually called ‘benefit societies’, although the older term ‘friendly society’ is still occasionally used. Mutual aid associations have always helped poor people cope with adversities on an informal and spontaneous basis, but many are now adopting formal operating procedures and becoming better organized. Many have evolved into formal, nongovernmental microinsurance organizations. These organizations transcend traditional community obligations and now represent voluntary membership based on individual self-interest and choice. They also go beyond the small-scale,

Introduction 5 spontaneous grassroots associations that characterized mutual aid in many parts of the developing world in the past. Although still loosely defined, the term ‘microinsurance’ is today widely used to refer to these organizations and their activities. In many cases, microinsurance organizations have evolved out of small-scale, spontaneous grassroots mutual aid associations. Sometimes, all types of mutual aid are referred to as microinsurance, but usually it connotes only those associations that have experienced a degree of formalization or otherwise have evolved into nongovernmental organizations. The term is also used to refer to existing nongovernmental microfinance organizations that have introduced insurance products designed to meet the needs of their members. The term is also used to describe the insurance services offered by government and commercial insurance firms tailored to the needs of low-income people. Although commercial providers have not introduced microinsurance schemes on a significant scale, many more are becoming involved in the field and are expanding their operations. Some have formed partnerships with nongovernmental organizations to provide microinsurance products. Microinsurance organizations are the primary focus of this book. It highlights a number of mutual aid associations in the Asian region that have undergone a process of formalization from informal and spontaneous mutual aid to microinsurance. These organizations usually elect board members and appoint staff and, in several cases, have registered as banks or insurance firms with governmental regulatory agencies. Unlike grassroots mutual aid associations, which often use discretion liberally when deciding contribution and benefit amounts, microinsurance programmes have specified contribution rates and benefit levels which mirror the practices of statutory and commercial schemes. They also use the language of commercial insurance to refer to their services. The case studies in the following chapters show that the adoption of systematic procedures for insuring poor people against risk is becoming more widespread. However, the trend towards microinsurance does not reflect the ‘revival’ of traditional mutual aid but represents an alternative approach that is often based on community-initiated arrangements incorporating government policy measures, market innovations and technical support. While those who are influenced by communitarian ideas may applaud this trend for affirming community engagement, it should be noted that microinsurance involves the creation of associations by selfmotivated members who are fully aware of the benefits that accrue from investment. Similarly, while market liberals may view microinsurance as a welcome expression of self-responsibility and rationality among the poor, it also strengthens and is in turn sustained by mutual support and collective decision-making. Clearly, the issues are complex and require nuanced interpretations. A key issue in this book is the link between mutual aid, microinsurance and governments. The book argues that in the absence of adequate social security protection for the population as a whole, mutual aid and microinsurance organizations deserve the support of national governments as well as international development agencies. It also contends that mutual aid and microinsurance activities should be harmonized and ultimately integrated with formal, statutory social

6 Mitsuhiko Hosaka and James Midgley security schemes. This argument is based on both equity and efficiency criteria. It is indefensible on grounds of equity that social security programmes continue to exclude those who have the greatest need for income protection. In terms of the efficiency criterion, economic development goals are more likely to be met if people are able to deal effectively with the adversities that threaten their livelihoods and impede their participation in the productive economy. Several case studies in this book also show that microinsurance offers an opportunity for increasing social capital. If people are deemed to be agents of change and not merely the passive recipients of welfare services, governments must enable them to respond collectively to adversity. Promoting the active participation of local communities in managing risk is an important component of efforts to enhance people’s participation in development.

Social security, mutual aid and microinsurance As global efforts to eradicate poverty through international action intensify, ways of extending social security coverage to all must be found. This ideal is compatible with the adoption of the Millennium Development Goals by most member states of the United Nations. It is also compatible with the International Labour Organization’s (ILO) recent ‘social security for all’ campaign (Reynaud, 2002). The task of expanding social security for all can be facilitated in different ways but one option is to integrate statutory and non-formal institutions. It is not acceptable that government social protection programmes continue to meet the needs of only some sections of the population but disregard the pressing needs of the impoverished majority. Government social protection programmes have a long history but it was only in relatively recent times that these programmes expanded on a significant scale. A major development was the creation of statutory poor funds in a number of Northern European cities in the fifteenth century which assisted those who could not support themselves or who had no relatives to care for them. Typically, support was provided to widows, the destitute elderly and those with disabilities. The Elizabethan Poor Law of 1601 in England was the first nationally mandated social assistance scheme and it shared many similarities with the municipal programmes that had been established earlier in continental Europe. In the nineteenth century, the Poor Law was radically amended to reduce the numbers of able-bodied unemployed who were receiving benefits. Its punitive provisions, which included incarceration in workhouses, were widely feared and spurred the development of mutual aid. By the early twentieth century, millions of people in England were afforded a degree of income protection through the friendly societies and the trade unions which pooled the contributions of their members to meet various contingencies. This approach was based on what became known as the ‘insurance principle’. It was in this context that the government of Germany adopted the insurance principle and created the first statutory social insurance scheme in 1883. This scheme provided sickness insurance but it was subsequently augmented with work

Introduction 7 injury and retirement provisions. The British government introduced a sickness insurance and temporary disability scheme in 1911 and a retirement insurance scheme in 1925. In 1935, at the height of the Great Depression, the government of the United States established a comprehensive social insurance programme providing unemployment, disability, retirement and survivor’s benefits. Although referred to initially as ‘economic security’, the term ‘social security’ was adopted in the American legislation of 1935, and it has since been used internationally. By this time, a number of other European governments had also introduced social insurance schemes covering different contingencies and larger numbers of workers. Statutory social security programmes proliferated after the Second World War, and by the end of the twentieth century most of the world’s governments had introduced social insurance schemes. These schemes were usually accompanied by social assistance and other forms of social security such as social allowances and provident funds. The expansion of social security during the twentieth century was actively promoted by the International Labour Organization and the United Nations which urged governments to provide social security as a human right. Generally, the goal of extending social security on a universal basis has been met by the governments of the Western countries, Japan and many pre-transition socialist countries such as the Soviet Union, but it has not been achieved in the Global South. Here, many people rely on mutual aid associations, and on other forms of non-formal support to manage risk and meet their social protection needs. Although statistical data about the coverage of social security schemes in the Global South are imprecise, Hall and Midgley (2004) reviewed several studies of the extent of social security coverage and report that the highest rates are found in South American countries such as Argentina, Chile and Uruguay, and in highincome Asian countries such as Korea and Singapore where as many as 80 per cent of the economically active workforce is protected by statutory social security. Although coverage is also comparatively high (ranging from 15 to 33 per cent) in some South American countries such as Columbia, Ecuador and Peru, most other countries in the region have coverage rates of below 15 per cent. In Sub-Saharan Africa, most countries have far lower coverage rates, often falling below 1 per cent of the economically active population. Even in higher income North African countries such as Tunisia and Morocco, coverage is less than 25 per cent. In lowincome Asian countries, coverage rates are well below 10 per cent. In India and Indonesia, where efforts to extend social security coverage have been made, the proportion protected by the statutory social security system is just under 10 per cent. More recent estimates (Forteza et al., 2009; van Ginneken, 2010) have confirmed the finding that social security coverage in the Global South remains very inadequate. As noted earlier, the International Labour Organization is actively campaigning to extend social security coverage to the excluded majority. Following extensive discussions at the International Labour Conference in 2001, the organization’s Global Campaign on Social Security Coverage has focused attention on the issue and various proposals for extending the coverage of statutory schemes have been formulated (Reynaud, 2002). These proposals have been largely concerned with

8 Mitsuhiko Hosaka and James Midgley extending the membership of these schemes to those who are not protected, such as informal sector workers, but discussions on how grassroots community-based social security such as mutual aid can be strengthened and integrated with the governmental system have also taken place. More publications describing the operation of mutual aid and microinsurance organizations in the developing world have appeared, and examples of how governments have sought to support these associations have been given. The prospect of integrating grassroots and formal statutory social security is today becoming a distinct possibility. If adequately supported, microinsurance has the potential to extend social security coverage to many individuals and families in the Global South who are currently excluded from government social security schemes but who face serious vulnerabilities and cope as best they can with the risks of daily life. Although hundreds of millions of people already utilize a plethora of mutual aid associations, this book argues that their activities should be strengthened and supported by governments. Governments should also promote the formalization of mutual aid. There are different ways of achieving this goal but an initial step would be to recognize, study and legitimize what people at the grassroots have been practising, and to share information and experiences. The microinsurance activities of existing nongovernmental organizations should also be supported. In addition, policies that effectively integrate the activities of mutual aid associations with the statutory social security system should be adopted. By discussing grassroots social security in Asia, and microinsurance in particular, this book hopes to contribute to the goal of extending social protection to all.

The scope of this book Today, many grassroots mutual aid associations in the Global South are making greater use of modern managerial, financial and governmental procedures, and many have become incorporated as banks and registered savings and credit cooperatives. Like the expansion of microfinance and microenterprise during recent decades, microinsurance is now more widely used to provide income protection to agricultural workers, small farmers, traders and self-employed workers in the urban informal sector. Although a great deal of information about their activities is now available, more information and research is needed if their potential to contribute to the security of the hundreds of millions of people who are excluded from statutory protection is to be properly assessed. Social security scholars and policy-makers advocating their integration with statutory programmes will benefit from knowing more about their work. This book seeks to contribute to this task by documenting the activities of mutual aid associations and microinsurance organizations in Asia where they are especially well developed. Several case studies that provide information about these associations and their activities in different parts of the region are included. These case studies not only provide descriptive information but offer insights into the potential of these associations to offer social protection to larger numbers of people. They also offer policy lessons about how the activities of grassroots mutual aid

Introduction 9 associations and microinsurance organizations can contribute to the formulation of comprehensive social security strategies that contribute to the goal of providing social security to the population as a whole. The book begins with two chapters by James Midgley which offer an overview of grassroots social security and microinsurance. In the first chapter, the author provides a generalized introduction to the topic by examining the nature of mutual aid in the Global South. The different types of grassroots associations found in the developing world are discussed and their diversity and fluidity are emphasized. Midgley suggests that standard definitions of mutual aid do not capture its complexities. The author also provides a detailed account of the historical evolution of mutual aid. Next, he reviews academic research in the field and examines the different conceptual perspectives that have been used to interpret mutual aid activities. He shows that four major perspectives which highlight very different aspects of mutual aid have emerged. In Chapter 2, Midgley discusses some of the challenges of mutual aid which should be borne in mind when policies for strengthening mutual aid and linking grassroots activities more positively to statutory social security schemes are considered. The author suggests that many of these challenges can be met through the formalization of mutual aid and by greater efforts by governments and other agents to support microinsurance organizations. The chapter then examines the emergence of microinsurance and the different forms it has taken in different parts of the world. The potential of microinsurance to transcend the limitations of informal mutual aid and to play a more effective role in social protection is also examined. Part II presents six case studies of microinsurance programmes in different Asian countries. In each chapter, gaps in the statutory social protection systems are identified and the role of key actors in grassroots social security is discussed. The case studies highlight mutual associations and supporting agencies that provide microinsurance programmes with reference to their history, scope, degree of formalization and current situation. Attention is also given to the challenges these programmes face and the extent to which mutual associations link with wider national social security and economic development programmes. Chapters 3 and 4 focus on microinsurance as promoted by microfinance institutions. First, Mariko Okamoto provides an account of microinsurance programmes in India. The author points out that the vast majority of the country’s population has no access to the government’s social security system and that they rely on a variety of non-formal mechanisms to meet their needs. Recently, nongovernmental organizations as well as private commercial providers have begun to offer microinsurance to those who struggle to manage the risks they face on a daily basis. Several schemes of this kind and the work of the government in supporting microinsurance are discussed. Special attention is paid to the role of microfinance institutions in extending microinsurance for the poor, and their advantages and limitations are analysed. Chapter 4 by Jaime Aristotle B. Alip and Takayoshi Amenomori discusses a major microinsurance programme in the Philippines initiated by the Center for Agricultural and Rural Development (CARD). CARD began its operation as a NGO

10 Mitsuhiko Hosaka and James Midgley in the 1980s when it used a modified Grameen Bank model to assist landless rural workers. It has since grown into a large and formal financial organization, catering for more than a million poor women clients. CARD also played a pivotal role in developing microinsurance in the country. It first established a mutual fund to provide loan protection and burial assistance for its clients and this soon expanded to include a pension fund. The mutual fund grew into the CARD Mutual Benefit Association (CARD MBA) which was a legal entity owned and managed by members. The chapter’s authors trace the history of the organization and show how its formalization could inform efforts by other microinsurance programmes to expand their services. The authors stress the importance of members’ selfmanagement of microinsurance through asset ownership. Chapters 5 and 6 present grassroots social security schemes that are owned and managed by communities. Chapter 5 by Mitsuhiko Hosaka and Nandasiri Gamage deals with the community-initiated, self-managed microinsurance activities developed by the Women’s Coop in Sri Lanka. Government’s social services are quite extensive in Sri Lanka, yet two-thirds of the workforce and their families are not covered by statutory social security schemes. In the 1980s, the government adopted an enabling policy framework which created an opportunity for women in slum communities to initiate various income generation and protection activities. The authors document the provision of community-managed social protection programmes such as life insurance, survivors’ pensions, medical care and other insurance schemes, and discuss how they have evolved and are sustainable on a self-investment basis. The chapter’s authors suggest how the government could effectively support grassroots initiatives of this kind. Chapter 6 by Panthip Petchmark, Somsook Boonyabancha and Mitsuhiko Hosaka discusses the role of the Community Organization Development Institute (CODI), a government-established entity extending organizational support and loan capital to community-based organizations in low-income settlements in Thailand. CODI actively supports local mutual aid and microinsurance initiatives and has enabled a large number of informal sector workers who are excluded from formal social security coverage to create a variety of community social security provisions such as funeral grants, health insurance and medical subsidy, scholarships, credits for disabled or unemployed members and assistance to HIV positive members. The chapter also presents a case study of how a Buddhist-based village community fund operates with CODI support. In Chapter 7, Mariko Okamoto offers an analysis of the problems and possibilities of microinsurance in the context of nomadic families in rural Mongolia. The author describes the collapse of the statutory social security system and the increasing incidence of poverty in the wake of the country’s transition to a market economy. It shows that there are operational difficulties that prevent commercial financial institutions from providing microfinance and microinsurance to herders in sparsely populated areas. Moreover, microfinance alone can hardly create new job opportunities in the economically stagnating provincial towns. Yet it is nomadic families in the country’s rural areas who suffer most from risks and particularly natural disasters that prevent them from effectively enhancing their economic opportunities.

Introduction 11 The chapter discusses a pilot scheme of livestock insurance to provide social protection for nomadic people. It identifies the significance of area-specific insurance products and the need for a proper organizational base for microinsurance for nomadic people. Chapter 8 by Sirojudin and James Midgley considers the religious and institutional dimensions of social security and discusses Islamic grassroots organizations in Indonesia. The authors note that the vast majority of the country’s population have no access to the government’s social security system and that many make use of non-formal institutions to meet their social protection needs. Recently, the government has approved the creation of Islamic organizations that are authorized to collect and distribute zakat contributions and, in addition, Muslim scholars have encouraged and supported the creation of local microfinance and microinsurance organizations that help poor people to establish small businesses. The strengths and weaknesses of these Islamic associations are discussed and implications for policy are considered. Part III contains one concluding chapter by Mitsuhiko Hosaka and James Midgley that seeks to draw together the material provided in the case studies. It focuses on policy key lessons to be learned from the case studies by discussing the trend towards the formalization of grassroots social security and its gradual evolution into microinsurance. It contends that microinsurance plays an important role in meeting the income protection needs of low-income people in Asia and the developing world in general, but that this potential can best be realized through the integration of microinsurance with statutory social security provision. Governments working together with different partners including mutual aid associations, microinsurance organizations, international agencies, nongovernmental organizations and, above all, community-based groups should, the authors contend, develop comprehensive social protection plans that set targets for providing social security to the population as a whole. In addition, much more needs to be done to support and strengthen grassroots social security. A number of specific policy interventions that may be used to achieve this goal are discussed.

References de Waal, F. (2009). The Age of Empathy: Nature’s Lessons for a Kinder Society. New York: Harmony Books. Forteza, A., Lucchetii, L. and Pallares-Miralles, M. (2009). Measuring the Coverage Gap. In R. Holzmann, D.A. Robalno and N.T. Takayama (eds), Closing the Coverage Gap: The Role of Social Pensions and other Retirement Income Transfers. Washington, DC: World Bank, pp. 23–40. Hall, A. and Midgley, J. (2004). Social Policy for Development. Thousand Oaks, CA: Sage. Kidd. A. (1999). State, Society and the Poor in Nineteenth Century England. New York: St Martin’s Press. Kropotkin, P. (1902). Mutual Aid: A Factor of Evolution. London: Heinemann. Maes, A. (2003). ‘Informal Economic and Social Security in Sub-Saharan Africa.’ International Social Security Review 56(3/4), 39–58. Midgley, J. (1984). Social Security, Inequality and the Third World. New York: Wiley.

12 Mitsuhiko Hosaka and James Midgley Reynaud, E. (2002). The Extension of Social Security Coverage: The Approach of the International Labour Office. Geneva: ILO. van Ginneken, W. (2010). ‘Social Security Coverage Extension: A Review of Recent Evidence.’ International Social Security Review 63(1), 57–76. von Benda-Beckmann, F. and Kirsch, R. (1999). ‘Informal Security Systems in Southern Africa and Approaches to Strengthen them Through Policy Measures.’ Journal of Social Development in Africa 14(2), 21–38.

Part I

The issues

1

Understanding mutual aid James Midgley

Mutual aid associations, comprising groups of people who pool resources for a variety of social protection purposes, are a key component of the wider ‘non-formal’ social security system which was mentioned in the Introduction to this book. In addition to helping poor people respond to adversity, some play an important role in facilitating savings and accumulating capital. Others specialize in providing credit. However, there is a great deal of overlap so that one type of association may, in fact, provide a service typically associated with another type. Similarly, while social science research suggests that mutual aid associations are characterized by informality, spontaneity and flexibility, they are very diverse. Many have adopted formal operating procedures, some have become large and impersonal and some have evolved into organized microinsurance organizations. The formalization of mutual aid and its transformation into microinsurance is a topic of growing interest to social security scholars and policy-makers today who are seeking to extend coverage to the majority of the South’s population who are excluded from statutory schemes. Formalization is also of interest to nonprofit organizations seeking to alleviate poverty, and to commercial providers who are increasingly being persuaded that mutual aid is amenable to marketization. This chapter provides an overview of mutual aid while Chapter 2 discusses the emergence of microinsurance. It begins by identifying the major types of mutual aid associations that may be found in both the rural and urban areas of the developing countries. As will be shown, these associations range in size and scope, and they are also adaptable and frequently adopt new roles and functions. The historical evolution of mutual aid is then discussed, showing that mutual aid associations are very old and can be traced back to the artisan guilds of the ancient civilizations. Finally, the way scholars have attempted to conceptualize the field is examined. The activities of mutual aid associations have been interpreted from different disciplinary perspectives that provide valuable insights into the role of these associations in the Global South. Although they have not been integrated into a unitary theoretical explanation, they provide a basis for understanding, mutual aid and formulating policies for enhancing its effectiveness.

16 James Midgley

Features of mutual aid associations Social science research into mutual aid associations in the developing world has proliferated over the years and a great deal of information about the nature, key features and functions of these associations has been collected. Initially, a shared view of the characteristics of mutual aid associations was adopted and it was generally agreed that they are small, comprising people who know each other and based on the cooperative practice of pooling resources. They are also believed to be informal, spontaneous and flexible. Most operate without rigorous rules and regulations, and respond to the needs of their members on a case-by-case basis. Their activities are also said to be based on trust and social obligations, and are rooted in the local community and its cultural norms of cooperation and reciprocity. However, as more studies of mutual aid associations have been published over the years, it has been recognized that mutual aid practices are fluid, complex and not amenable to simple definition or categorization. Today, a more nuanced approach to understanding these associations has emerged and there is a reluctance to define mutual aid associations in terms of their key features or primary functions. Nevertheless, it is agreed that an understanding of the major activities of mutual aid associations has a useful classificatory purpose. Burial or funeral societies are among the most ubiquitous mutual aid associations. They collect regular contributions from their members and pay a lump sum benefit at the time of the member’s death. Usually, the head of the family or primary breadwinner is covered but sometimes other family members may also be included. They are very common in the developing world and express the need as well as the cultural expectation that a person’s status in the community and the esteem of their family is reflected in an appropriate burial with commensurate commemoration and ceremony. Funeral associations were previously common in Western countries where the fear of a pauper’s burial motivated many poor people to belong to these societies. Benefit associations are another type of mutual aid that offer protection against a wider range of contingencies including sickness, unemployment, disability and the death of breadwinners. In many cases they also offer funeral insurance – indeed, many benefit associations evolved out of burial societies. Generally, a great deal of discretion is used to assess need and to determine the level of benefit and, in some cases, members may be assisted to settle loan obligations or to pay fines or meet other financial commitments. Benefits may take the form of loans, repayable at varying rates of interest, or they may comprise outright grants to particularly needy members or their dependants. Benefit associations are especially common among people who work together. Often, people in similar occupations such as market traders, taxi drivers, textile weavers, porters and street vendors form associations of this kind. Rotating credit and savings associations (ROSCAs) are a very popular form of mutual aid and are primarily concerned with promoting the accumulation of capital. They are ubiquitous in the developing world and known by different names in different countries. For example, they are called arisans in Indonesia, stokvels in

Understanding mutual aid 17 South Africa, tontines in West Africa and cestas in Mexico. Typically, ROSCAs are small and their members know each other. The groups meet regularly and, at each meeting, contributions are collected, pooled and paid out to each member in turn. Members who receive the payout now have a lump sum at their disposal that may be used for various projects such as purchasing capital goods for small business purposes or acquiring tools to improve agricultural production, or repairing or improving homes. However, borrowing to pay for weddings and other celebratory events is also common. Members who receive the payout early in the process continue to contribute so that all members benefit. Different techniques are used to determine the payout order. In some cases, senior members have priority while in others lotteries are used. In some cases, members in urgent need of capital may negotiate to be given priority or bids may be invited to determine the payout sequence. Often, extra charges are levied for the privilege of having priority. Because ROSCAs are governed by well-understood obligations embedded in social relationships, defaulting is uncommon. Many ROSCAs disband once a full payout cycle is completed, but many re-form, sometimes with new and different members. Others are much more permanent and function for many years. Accumulating savings and credit associations (ASCAs) are community-based financial institutions that make loans to local people on a commercial basis. Members of ASCAs, who are usually wealthier members of the community, have funds to invest and expect to receive a profit on their investments. Although loans may be made to provide income support in times of need, they are more usually granted for economic purposes such as the purchase of capital goods, farming investments or small business development. In addition, local people may apply for loans to cover the costs of school fees, pilgrimage, celebrations, medical care and other activities. ASCAs complement the activities of traditional moneylenders and pawnbrokers whose services are widely used by poor people. Although most commentators agree that mutual aid associations can be classified into burial associations, benefit associations, ROSCAs and ASCAs, it has already been noted that they are diverse, versatile and fluid. For example, ROSCAs and ASCAs may take many different forms, often modifying their rules to suit the changing needs and circumstances of their members. Similarly, while most ROSCAs comprise friends and neighbours, they may also involve transactions between strangers. This is the case with the Chit Funds in India, many of which have become large and commercialized. The collection and payout methods used by ROSCAs also vary greatly. Although most make payouts at each meeting so that no cash is actually accumulated in a communal fund, some do maintain reserves to cover operating expenses or to help members in financial need. Most ROSCAs agree the contribution rate in advance, but others vary this amount depending on their members’ changing needs. In addition, ROSCAs do not always dissolve at the end of the payouts cycle and often the same ROSCA may re-form, although its membership may change. In some cases, ephemeral ROSCAs may evolve into relatively permanent organizations. In some countries, they continue with a stable membership for long periods of time. As Lukhele (1990) reveals in his account of the South African stokvels, many of these associations have been in existence for

18 James Midgley years and are highly selective when admitting new members. They have elaborate rules and procedures which belie the idea that ROSCAs are informal. To complicate matters further, ROSCAs may evolve into other types of mutual aid associations and may transcend their saving functions by providing assistance to needy members, often in the form of loans. Again, a great deal of discretion may be used to decide the value and extent of benefits. To further illustrate the diversity of mutual aid, it should be noted that some mutual aid associations, which are based on the rotation principle, may engage in nonmonetary exchanges. For example, the paketans in Indonesia, which are mostly found in the urban areas, do not collect cash contributions and instead require their members to bring food, produce and livestock to ceremonial feasts which are held among groups of friends, family members and neighbors on a regular basis. While the paketans are similar to ROSCAs, they are not engaged in accumulating monetary capital but in building and maintaining solidarity and congenial relationships among relatives, friends and neighbors. ASCAs also take different forms. Although they are usually established for the purpose of lending funds to local people, they may also lend to their own members and, because of their flexibility, may offer quite different interest and repayment terms to different borrowers. Mention was previously made of the fact that mutual aid associations are to be found primarily in the developing world. Although it is true that they do not operate on an appreciable scale in the West today, they are by no means extinct. They are common among immigrant communities and may also be found among people who establish informal savings clubs. Some operate more formally as Christmas savings clubs to which members contribute regularly in order to accumulate funds for the festive season. Mutual aid associations were previously commonplace in Europe and other Western countries. Among the oldest were the communal funds operated by the craft guilds in the medieval towns but they were subsequently augmented by the emergence of burial societies, savings clubs and the ubiquitous ‘friendly societies’ that flourished in Europe, Australia and North America in the nineteenth century.

Mutual aid associations in historical perspective Like cooperative endeavor itself, the practice of forming associations with a social protection function is very old. Among the earliest mutual aid associations are the artisan guilds which comprised skilled craftsmen who labored together, who shared knowledge and techniques and apprenticed new workers. They collected dues that were accumulated in communal funds to meet the guilds’ operating expenses. These funds were also used to support members who were ill, injured or disabled; and they helped the widows and children of members who had died. Archeological evidence reveals that guilds were in existence in the ancient urban civilizations of Mesopotamia and Egypt, and records showing that artisan guilds or sangh flourished in India thousands of years ago are still in existence (Chansarkar, 1960). During the Roman period, lawyers and physicians also formed guilds. The guilds flourished in the cities of medieval Europe and formed an integral part of the feudal structure.

Understanding mutual aid 19 In fact, the term ‘guild’ came into use at about this time and derives from the gold coins or guilder stored in the communal treasury. In addition to providing income protection, the guild’s resources were also used to support local festivals and religious and civic activities. Guild members also played an active role in the life of the community, contributing to local churches and forming militias to police the streets. Although subjugated to feudal authority, they exerted considerable political and economic influence. The lay brotherhoods or confraternia in Catholic countries also had a mutual aid function. In addition to their religious activities, they collected contributions from their members which were used to assist the church’s charitable work and to establish local orphanages, hospitals and almshouses. Funds were also used to assist members in times of need. Although the confraternia comprised merchants, government officials, lawyers and physicians who were generally able to provide for themselves and their families, the dependants of deceased members were often assisted through widows’ grants or scholarships for educating children, or dowries for the daughters of the deceased. The emergence of burial associations, dividing societies and friendly societies in Europe was another important development in the evolution of mutual aid. Although associations of this kind are very old, they appear to have become better organized as industrialization and urbanization in the nineteenth century undermined familial and community support networks and harmed the well-being of millions of ordinary people. As noted in the Introduction to this book, friendly societies evolved out of the dividing societies formed by groups of friends and neighbors who periodically divided their pooled contributions. The friendly societies also collected contributions to pay for funerals and to help members when they were sick and unable to work. In some cases, friendly societies provided only one type of service such as burial or sickness insurance, but others were more comprehensive and often discretion was used so that benefits were adjusted to meet the particular needs of members and their families. As more people migrated to the cities and were exposed to the risks associated with industrial wage labor, the friendly societies expanded rapidly. In England, the Poor Law of 1837 also spurred the expansion of the friendly societies which provided an alternative to the increasingly punitive public poor relief system. Although the friendly societies were originally rooted in their local communities, in the late nineteenth century, many small, local societies merged to form regional and national associations which recruited members from all over the country. When the British government appointed a Royal Commission to study their activities in 1874, over 30,000 societies with approximately four million members had been established. Kidd (1999) notes that their membership continued to grow and reached six million by the early twentieth century. Another development was the creation of communal funds by the expanding trade unions. In addition to bargaining with employers for wages and improved working conditions, some unions created funds which pooled contributions to pay income benefits to members who were unable to work owing to illness, injury or disability. Like the friendly societies, they also helped the dependants of those

20 James Midgley who died. In the late nineteenth century, when medical care became more sophisticated and expensive, some unions introduced health insurance by establishing funds that paid cash benefits to members to meet the costs of medical treatment. In time, they began to use panels of approved physicians that provided care to their members for a standard fee. Eventually, some unions employed their own physicians and established their own clinics (Bruce, 1961). The friendly societies also became major providers of health insurance and also built clinics and hospitals to cater for the medical needs of their members. The unions and their political allies lobbied vigorously for the introduction of statutory social security programmes based on the ‘insurance principle’ of pooling members’ contributions. High priority was given to the provision of sickness and employment injury insurance. As resentment against the unfair practice of dismissing sick or injured workers increased, the unions successfully lobbied governments to mandate the payment of benefits on a no-fault basis, or otherwise to establish work injury insurance programmes. As noted in the Introduction, the government of Germany took the lead by establishing the world’s first statutory social insurance programme in 1883 and, in time, social insurance schemes were established in other countries. With the expansion of statutory social security and health care, the friendly societies went into decline and the welfare provisions of the unions were no longer needed. Some friendly societies evolved into commercial insurance firms while others focused on providing recreational and cultural activities. Although the activities of mutual aid associations have been particularly well documented in Britain and other Western countries, they have existed throughout the world since ancient times. Mention was made in the Introduction of village friendly societies and rice banks in pre-industrial Japan and, as noted earlier, associations of artisans were providing income protection to their members in the ancient Mesopotamian and Indian civilizations. More recently, in the nineteenth century, historical records show that mutual aid associations were operating in different parts of the empires of the European powers. For example, in 1876 a British government committee appointed to investigate labour conditions in Singapore reported that more than fifty local mutual aid associations providing income support and other welfare services had been established among the Chinese community (Hodge, 1973). In Jamaica, mutual associations among former slaves proliferated following emancipation and, in 1842, legislation was introduced to regulate their activities (Cumper, 1972). In Latin American countries, retirement savings societies known as montepios emerged in the mid-nineteenth century when groups of civil servants, who relied on discretionary government pensions or gracias for their retirement income, became increasingly dissatisfied with the arbitrary nature of these awards. Although the montepios provided pensions as well as grants to widows and dependants, they were often poorly administered and unable to meet their pension obligations, and eventually governments assumed responsibility for their management (Mesa-Lago, 1978). Another development was the importation from Europe of the confraternia which became very active in the region. Like the Church and the missions, they made a major contribution to the evolution of the region’s social welfare system.

Understanding mutual aid 21 In Africa, the numbers of burial, benefit and rotating credit societies increased as growing numbers of rural people moved to the cities in search of work. These and other mutual aid associations proliferated in the informal urban settlements in the years following the Second World War and, in addition to their income protection function, they assisted their members in developing new social networks, especially in the urban areas (Little, 1965). More information about mutual aid associations in the Global South became available in the 1950s when a number of anthropological studies into their activities were undertaken. Although historians had previously noted the existence of mutual aid associations, scholars such as Ardener (1953, 1964), Geertz (1956, 1962) and Little (1957, 1965) were struck by their ubiquity and wider significance, and undertook detailed studies of their activities. Working among the Ibo people of Nigeria, Ardener recognized that the ‘contribution clubs’, as she called them, not only helped people to accumulate monetary resources but strengthened bonds of trust and social solidarity. Geertz invented the term ‘rotating savings and credit and associations’ (ROSCAs), and claimed that they served an important function in the process of modernization. Little argued that mutual aid and voluntary associations played an important ‘adaptive role’ by helping migrants adjust to the demands of urban life. Since these formative studies were published, a sizeable volume of research into mutual aid associations in the Global South has been undertaken. This research has confirmed that mutual aid is ubiquitous and that literally millions of associations providing opportunities for saving, obtaining credit, and securing financial assistance in times of hardship now function all over the developing world. They range greatly in size and type and, in addition to their economic and sociological functions, they make a major contribution to social protection by helping to meet the income needs of poor people. As noted earlier, they also strengthen social networks and foster social integration.

Interpreting mutual aid As was shown earlier, it is very difficult to categorize let alone define mutual aid associations. A few archetypal associations such as burial societies, ROSCAs and ASCAs can be readily identified, but it has been noted already that these associations and their activities are very fluid, often changing form and adopting new roles. Although the literature was previously replete with definitions that stressed the informality, small size and spontaneity of mutual aid associations, it is difficult to characterize these activities in simple terms and no standard definition of mutual aid has been adopted. The task has become increasingly difficult as mutual aid associations have evolved into larger and more organized microinsurance organizations. Instead of attempting to formulate a standard definition, the different perspectives that have been used by academics to conceptualize, interpret and understand mutual aid will be examined here. Four discrete but overlapping perspectives may be identified. They are, first, the sociological perspective which emphasizes the broader social functions of mutual aid associations and their role in the local community

22 James Midgley and wider society. The second perspective focuses on gender and pays particular attention to women’s involvement in mutual aid and the way their well-being and social roles are affected by their participation in these activities. The third is primarily concerned with the welfare activities of mutual aid associations, emphasizing their income protection role. The fourth perspective focuses on the financial activities of mutual aid associations and particularly on the way they provide credit at the local level. While a concern with grassroots finance characterizes the other perspectives as well, this approach emphasizes their role in local financial transactions and utilizes a neoclassical, microeconomic approach to analyse mutual aid. This has become more prominent in recent times and has played a significant role in the emergence of microinsurance. The sociological perspective was pioneered by cultural anthropologists in the 1950s and, as was common at the time, it focused on the wider social functions of mutual aid. As noted earlier in this chapter, Geertz, Ardener and Little were leading exponents of this approach. Geertz (1956, 1962) became aware of the activities of local savings associations while working in Eastern Java in Indonesia in the 1950s. After studying the activities of the arisans, as ROSACAs are known in Indonesia, he concluded that they played a vital role in the country’s transformation from a peasant to a modern society. Arisans, he argued, served an important social function by bridging the gap between the traditional and modern economy, and helping rural people to engage with the modern financial system. They were, he suggested, a vital intermediate or ‘middle-rung’ institution that facilitated the process of development. Geertz also analysed a number of previously published studies of ROSCAs in other countries, and noted that they were more rationally organized in countries such as Japan which had higher levels of economic development. This, he concluded, supported the argument that ROSCAs facilitated the transition from traditional to modern monetary activities. Ardener (1964) challenged this view. Like Geertz, she pioneered research into mutual aid, having studied ROSCAs among the Ibo people in Nigeria in the early 1950s. Ardener pointed out that these associations were not confined to the rural areas but were popular in the towns and cities as well as among salaried middleclass workers who were fully conversant with the modern monetary system. This finding has since been substantiated by numerous studies which have shown that middle-class people participate extensively in ROSCAs. For example, in a study of mutual aid associations in Botswana, Okurut and Botlhole (2009) found that the majority of the members were ‘non-poor’. Contrary to Geertz’s claim that ROSCAs enhance rational economic behaviour, she also noted that participation in these associations was not in fact economically rational since those who receive payouts early in the payout sequence benefit more than those at the back of the queue. While those at the front receive an interest-free loan, those at the back subsidize earlier beneficiaries. Examining the evidence, Ardener concluded that ROSCAs made a more important contribution to promoting social solidarity than facilitating economic modernization. Little’s (1957, 1965) account of mutual aid in West African urban settlements also stressed its integrative and networking function. However, unlike Geertz and

Understanding mutual aid 23 Ardener, Little did not confine his research to ROSCAs but documented the activities of a variety of mutual aid and other types of voluntary associations. He concluded that mutual aid associations played a significant role by fostering the adaptation of rural migrants to the demands of urban life. The transition from rural to urban living involved more than a spatial relocation of people but required new knowledge, skills and attitudes that determined the way migrants coped with the challenges of modernity. Mutual aid associations, he argued, helps migrants access the networks of support, information and reciprocity they need to make a successful transition from rural to urban living. Sociological research at the time recognized that women were extensively involved in mutual aid activities. For example, Little reported that women’s mutual aid associations were commonplace in Ghana in the 1950s. A number of them had been in existence for many years and conducted quite elaborate ceremonies and rituals. However, he did not explore reasons for the existence of separate women’s associations or speculate on the way they affected the lives of women, and this issue was only systematically explored many years later. A major contribution came from Ardener and Burman (1995) whose collection of case studies of ROSCAs comprised exclusively women and specifically addressed the gender dimension. These studies focused on different countries and different types of ROSCAs, but generally they found that women’s participation in mutual aid was economically empowering and that it also served social functions such as facilitating access to information and helping networks. Mutual aid associations also created congenial recreational opportunities and fostered social solidarity. The status of women who successfully accumulated capital increased, and they often experienced a significant improvement in self-esteem. Another factor is that women have been traditionally discriminated against by banks and other formal credit agencies. The government-sponsored savings cooperatives that were created in the rural areas of many developing countries in the 1950s and 1960s catered primarily for male farmers. Women who engaged in market trading and related agricultural activities were excluded, even though their need for credit was equally great. By participating in ROSCAs, they were able to accumulate capital to achieve greater agricultural yields, expand their livestock or operate small businesses. This conclusion is substantiated by numerous studies such as an account of women’s participation in ROSCAs in Ghana which found that most women joined these organizations to mobilize working capital for their small businesses (Bortie-Doku and Aryeetey, 1995). However, it should be remembered that accumulations are used for many different purposes including ceremonies and feasts that may not contribute directly to people’s economic wellbeing. Equally important is the role of mutual aid in empowering women within their own households. Although the situation is complicated owing to different cultural practices in different parts of the world, women are generally expected to take primary responsibility for childraising, and particularly for the health and education of children. They are also responsible for the care of elders and other dependants. However, they do not always have access to the resources they need to meet this

24 James Midgley obligation. This is due not only to the conditions of poverty in which they and their families find themselves but because the funds they accumulate to provide for children and other needy family members are sometimes expropriated by male household members. Van Leeuwen (2005) notes that several studies on microfinance projects in Bangladesh have found that borrowing is frequently manipulated by men who use the funds for their own purposes, leaving women to deal as best they can with the repayment demands of the microfinance organization. Another perspective views mutual aid associations primarily as social security or welfare institutions designed to maintain the income of their members in times of hardship. Their role in supplementing the incomes and assets of poor people is also recognized. The welfare perspective has been articulated by a number of social policy scholars such as the von Benda-Beckmanns and their colleagues associated with the Max Planck Institute for International and Social Law in Munich (von Benda Beckmann et al., 1988; von Benda Beckmann, F. and von Benda Beckmann, K., 1994, 2007) as well as Midgley (1984, 1994) and van Ginneken (1999, 2007) of the ILO. While the former group utilizes anthropological and legal insights, Midgley and van Ginneken approach the issue from an explicit social policy perspective. Nevertheless, all view mutual aid as one of a number of institutions that comprise the wider non-formal or ‘traditional’ social security sector which also includes family, kinship and local community networks as well as the charitable activities of faith-based organizations. The importance of these wider culturally determined social security mechanisms has been a primary focus of the research undertaken by the von Benda-Beckmanns (1994, 2007). These scholars believe that government should support and strengthen non-formal welfare activities, and mutual aid associations in particular. Recognizing that grassroots social security associations face significant challenges and are seldom able to provide adequate income protection, they advocate the provision of public resources in the form of subsidies, training and technical support which, they argue, can enhance the effectiveness of mutual aid as a form of social protection (von Benda-Beckmann et al., 1997). Midgley has been a strong advocate of linking mutual aid directly to the wider statutory system as a first step towards integrating the two, but von Benda-Beckmann and others (von Benda-Beckmann and Kirsch, 1999) are more cautious, pointing out that inappropriate government intervention can stifle local initiative. Van Ginneken also advocates the integration of mutual aid with formal social security schemes. His approach is informed by the ILO’s ‘Social Security for All’ campaign which approaches the problem of limited coverage by advocating policies that extend the coverage of existing social security programmes. Although he also recommends that mutual aid associations be strengthened, he is doubtful that this will result in enhanced social protection for the poor. Proponents of the financial perspective regard mutual aid associations as local credit institutions catering primarily for poor people. They pay little attention to their sociological gender or social welfare functions. Previously, sociologists such as Geertz and Ardener had recognized the role of ROSCAs in economic development. They realized that ROSCAs are a major source of credit in poor communities and that they have a wider impact on economic development. Subsequently,

Understanding mutual aid 25 Bouman (1995) expanded this argument to ASCAs, concluding that both types of mutual aid associations play a significant role in economic development in the Global South. Although Geertz believed that ROSCAs enhance economic rationality, he did not use the insights of neoclassical economics to frame his argument, and it was much later that these ideas were explicitly adopted. Besley and colleagues (1993) were among the first to use this approach and to formulate mathematical microeconomic models to explain the functioning of ROSCAs. Townsend (1994) also used the neoclassical approach in his analysis of household survey data of a group of villages in Southern India. He reached the conclusion that local mutual aid activities in rural communities are akin to modern systems of insurance and are an effective way of managing risk. He found that local households cooperate widely with each other to manage risk and that they do so rationally and efficiently. He believed that the village comprised an ‘insurance institution’ which deals more effectively with risk than do modern, commercial insurance firms or government programmes. He suggested that policy-makers should be less concerned with insuring individual households than with managing aggregate risks beyond the reach of the village institution. Townsend’s original conclusion that households act with a high degree of rationality in coping with risk is widely accepted, but his positive view of collective action by village communities has been questioned. Morduch’s (2006) analysis of the data concluded that cooperative risk-sharing was not in fact as pervasive as Townsend believed. Although people did cooperate, he found little evidence that the village community as a whole mobilized to support people in need. Instead, individuals and their families took steps to protect themselves or otherwise used specific networks based on kin and local community relationships. Of course, they also participated in mutual aid associations. Reviewing a number of studies designed to test Townsend’s findings, Duflo (2006, p. 368) concluded that there is no concerted or efficient village response to risk and that ‘it appears relatively clear that the claim made in the seminal Townsend paper gave too much credit to the village institution’. A subsequent analysis by Townsend and his colleagues (Townsend, 1995; Lim and Townsend, 1998) conceded that the original study overemphasized the effectiveness of the village institution, and that households in fact engage in a great deal of self-insurance such as carefully maintaining grain and other reserves which can be used in times of need. Nevertheless, Townsend explicitly infused the study of mutual aid with the language of neoclassical economics, financial risk and insurance, and contributed significantly to the emergence of the concept of microinsurance. At about the time when Townsend’s work was published, other economists were systematically studying the way poor families in the Global South cope with adversity. Dercon (2005) has summarized much of this research, showing that these families employ a variety of strategies both prior to experiencing income shocks and at the time when these shocks occur. He points out that they seldom passively accept the consequences of risk. These strategies include the practice of diversifying sources of income so that when a contingency affecting one income source arises

26 James Midgley the family has another source on which to draw. For example, farming families protect themselves by engaging in a variety of non-farming activities such as manufacturing crafts, selling foodstuffs or working for wealthier landowners. They also self-insure, by accumulating cash savings or assets that can be used to maintain income at times of hardship. In addition, those encountering a sudden loss of income frequently borrow from family, kin, friends and community members to meet their needs. They also employ the services of moneylenders and, in some communities, will even commit their children to debt bondage. Although innovations in microfinance have to some extent mitigated these crises, there is an urgent need for a more organized response in the form of microinsurance. A major contribution to understanding mutual aid and its role in the lives of poor people and their families in the Global South comes from Collins and her colleagues (2009) who collected extensive data on the way these families manage their financial affairs. They asked a sample of both urban and rural people in three countries – Bangladesh, India and South Africa – detailed questions about their finances, and from this information constructed diaries of how they earn, spend and manage their money. Two hundred and fifty families in these countries were tracked for one year. The authors show that poor people enter into a great variety of relationships not only with organized mutual aid associations but with many others who contribute to their ongoing struggle to cope with insecurity. Different resources are often accessed simultaneously so that people may borrow from diverse sources including family and kin members, neighbours, shopkeepers, pawnbrokers, savings banks, cooperative societies and local moneylenders. They also found, perhaps surprisingly, that some people in their sample borrowed money from ‘informal’ financial sources of credit such as local moneylenders and pawnbrokers even if they had reserve funds on which to draw. Similarly, some of the South African respondents revealed that they had bank accounts, but preferred to use ROSCAs and other informal sources rather than accessing their funds for fear that they would spend the money or otherwise be approached by family members or neighbours for loans. Although some respondents paid high rates of interest for these loans, they took this into account when calculating how best to manage their financial affairs. A major consideration was the discipline and pressure that high interest rates exerted on borrowers to promptly repay their loans. Some of the respondents reported that they paid local collectors or traditional bankers, such as the West African esusu, to keep their money, even though their fees were comparatively high. Although poor people engage in financial transactions which do not appear to be in their best interests, they make sense when people seek to accumulate savings to meet unexpected contingencies. Research undertaken from the financial perspective has shown that poor people act rationally and are proactively engaged in assessing, planning and managing their financial affairs. They are strongly motivated to accumulate reserves to meet unforeseen adversities and they do so through utilizing a wide variety of local resources, coping reflexively with the adversities that may plunge them below the survival margin. The financial approach has radically shifted the focus of research into mutual aid from one which views grassroots associations in sociological, gender

Understanding mutual aid 27 or welfare terms and instead emphasizes the rational choices and behaviours of poor families. Although the neoclassical paradigm which informs this research may be questioned, it has promoted an understanding of the meaning of mutual aid to those who struggle to make ends meet. Although all four perspectives offer valuable insights into mutual aid in the Global South, their interpretations focus on particular dimensions of mutual aid and thus provide only partial accounts of the nature and scope of these activities. Obviously, these different perspectives need to be systematically integrated if mutual aid is to be fully comprehended. Although this task still needs to be undertaken, scholarly inquiry into mutual aid has revealed its complexity. While it is helpful to understand mutual aid in terms of the types and features of different associations, the different perspectives discussed here promote a deeper appreciation of its functions, of how it reflects gender realities, provides income protection and meets the financial needs of ordinary people. They also have implications for policy as governments and nonprofit organizations engage in the task of poverty eradication. The transformation of mutual aid into microinsurance and the adoption of microinsurance policies and programmes that might be harnessed to contribute to this task will also be informed by this scholarship.

References Ardener, S. (1953). ‘The Social and Economic Significance of the Contribution Club Among Sections of the Southern Ibo.’ Proceedings, Annual Conference of the West African Institute of Social and Economic Research, Ibandan. Cited in Little (1965). Ardener, S. (1964). ‘The Comparative Study of Rotating Credit Associations.’ Journal of the Royal Anthropological Institute of Great Britain and Ireland 94(2), 201–229. Ardener, S. and Burman, S. (eds) (1995). Money-go-Rounds: The Importance of Rotating Savings and Credit Associations for Women. Herndon, VA: Berg. Besley, T., Coate, S. and Loury, G. (1993). ‘The Economics of Rotating Savings and Credit Associations.’ American Economic Review 83(4), 792–810. Bortie-Doku, E. and Aryeetey, E. ( 1995). ‘Mobilizing Cash for Business: Women in Rotating Susu Clubs in Ghana.’ In S. Ardener and S. Burman (eds), Money-go-Rounds: The Importance of Rotating Savings and Credit Associations for Women. Herndon, VA: Berg, pp. 77–94. Bouman, F.J.A. (1995). ‘Rotating and Accumulating Savings and Credit Associations: A Development Perspective.’ World Development 23(3), 371–384. Bruce, B.T. (1961). The Coming of the Welfare State. London: Batsford. Chansarkar, M.A. (1960). Social Insurance for the Indian Working Class. Bombay: Vora Publications. Collins, D., Morduch, J., Rutherford, S. and Ruthven, O. (2009). Portfolios of the Poor: How the World’s Poor Live on $2 a Day. Princeton, NJ: Princeton University Press. Cumper, G. (1972). Survey of Social Legislation in Jamaica. Mona: Institute for Social and Economic Research, University of the West Indies. Dercon, S. (2005). ‘Risk, Insurance and Poverty.’ In S. Dercon (ed.), Insurance Against Poverty. New York: Oxford University Press, pp. 9–37. Duflo, E. (2006). ‘Poor but Rational?’ In Banerjee, A.V., Benabou, R. and Mookerjee, D. (eds), Understanding Poverty. New York: Oxford University Press, pp. 367–378.

28 James Midgley Geertz, C. (1956). The Rotating Credit Association: An Instrument for Development. Cambridge, MA: Massachusetts Institute of Technology, Center for International Studies. Geertz, C. (1962). ‘The Rotating Credit Association: A “Middle Rung in Development”.’ Economic Development and Cultural Change 10(3), 241–263. Hodge, P. (1973). ‘Social Policy: An Historical Perspective as Seen in Colonial Policy.’ Journal of Oriental Studies 9(3), 207–219. Kidd. A. (1999). State, Society and the Poor in Nineteenth Century England. New York: St Martin’s Press. Lim, Y. and Townsend, R. (1998). ‘General Equilibrium Models of Financial Systems: Theory and Measurement in Village Economies.’ Review of Economic Dynamics 1(1), 59–118. Little, K. (1957). ‘The Role of Voluntary Associations in West African Urbanization.’American Anthropologist 59(4), 579–596. Little, K. (1965). West African Urbanization: A Study of Voluntary Associations in Social Change. Cambridge: Cambridge University Press. Lukhele, A.K. (1990). Stokvels in South Africa. Johannesburg: Amagi Books. Mesa-Lago, C. (1978). Social Security in Latin America. Pittsburgh, PA: University of Pittsburgh Press. Midgley, J. (1984). Social Security, Inequality and the Third World. New York: Wiley. Midgley, J. (1994). ‘Social Security Policy in Developing Countries: Integrating State and Traditional Systems.’ Focaal 22/23(1), 219–230. Morduch, J. (2006). ‘Microinsurance: The Next Revolution?’ In Banerjee, A.V., Benabou, R. and Mookerjee, D. (eds), Understanding Poverty. New York: Oxford University Press, pp. 337–356. Okurut, F.N. and Botlhole, T. (2009). ‘Informal Financial Markets in Botswana: A Case Study of Gaberone City.’ Development South Africa 26(2), 255–270. Townsend, R. (1994). ‘Risk and Insurance in Village India.’ Econometrica 62(4), 539–592. Townsend, R. (1995). ‘Consumption Insurance: An Evaluation of Risk-bearing Systems in Low-Income Countries.’ Journal of Economic Perspectives 9(2), 83–103. van Ginneken, W. (ed.) (1999). Social Security for the Excluded Majority. Geneva: International Labour Office. van Ginneken, W. (2007). ‘Extending Social Security Coverage: Concepts, Global Trends and Policy Issues.’ International Social Security Review 60(2/3), 39–59. Van Leeuwen, I. (2005). Gender and Microinsurance. The Hague: Institute of Social Studies. von Benda-Beckmann, F. and von Benda-Beckmann, K. (1994). ‘Coping with Insecurity.’ Focaal 22/23(1), 7–31. von Benda-Beckmann, F. and von Benda-Beckmann, K (2007). Social Security Between Past and Future: Ambonese Networks of Care and Support. Berlin: Lit Verlag. von Benda-Beckmann, F. and Kirsch, R. (1999). ‘Informal Security Systems in Southern Africa and Approaches to Strengthen them Through Policy Measures.’ Journal of Social Development in Africa 14(2), 21–38. von Benda-Beckmann, F., Gsanger, H. and Midgley, J. (1997). ‘Indigenous Support and Social Security: Lessons from Kenya.’ In J. Midgley and M. Sherraden (eds), Alternatives to Social Security: An Iinternational Inquiry. Westport, CT: Auburn House, pp. 105–120. von Benda-Beckmann, F., von Benda-Beckmann, K., Casino, E., Hirtz, F., Woodman, G.R. and Zacher, H.F. (eds) (1988). Between Kinship and the State: Social Security and Law in Developing Countries. Dordrecht: Foris Publications.

2

Challenges to mutual aid The microinsurance response James Midgley

There has been a tendency in scholarly work on mutual aid to overstate and even romanticize the cooperative endeavours of traditional communities and to imply that mutual aid practices are an effective way of providing income protection in the Global South. It has often been claimed that traditional communities are characterized by a high degree of altruism and solidarity, with the result that people in need are adequately provided for. This interpretation characterized a great deal of formative ethnographic research in the nineteenth and early twentieth centuries but it is still popular today. It has even found expression in modern-day interpretations of social welfare such as that offered by Titmuss (1971), who believes that the social welfare policies of the Western nations reflect the same altruistic and solidarity tendencies found in traditional societies. Other social scientists, including hardheaded economists, have also commended the way in which rural communities in the developing world engage in collective action to meet their income protection needs. As noted in Chapter 1, Townsend’s (1994) research in India concluded that cooperative village activities are an effective way of dealing with risk. While these arguments are compelling, there is a serious lack of systematic evidence-based evaluative research into mutual aid in the Global South and it is not possible to substantiate claims about its effectiveness. Nevertheless, it was shown in the previous chapter that grassroots mutual aid associations play a significant role in helping poor people respond to adversity. The fact that these associations are used by literally hundreds of millions of low-income families in the developing world suggests that they do serve a useful purpose. On the other hand, their limitations must also be recognized. Scholars such as Morduch (1999, 2006) and Collins and her co-workers (2009) have shown that mutual aid is limited and fragmentary, and does not adequately meet the income protection needs of poor people. Mutual aid is not a panacea but is only one of numerous sources accessed by low-income families as they struggle to cobble together the resources they need to cope with the demands of daily living. Many studies are also candid about the challenges facing mutual aid. Research into burial societies, benefit associations and ROSACs has shown that problems such as fraud, weak leadership and unresponsiveness to members have been encountered. These problems need to be addressed if mutual aid associations are to contribute positively to social protection and play a significant role in extending social security coverage.

30 James Midgley The effectiveness of mutual aid associations can also be enhanced if they adopt policies and procedures that formalize their activities and facilitate their transformation into microinsurance organizations. Although formalization is not a magic solution, the adoption of clearly defined rules concerning contributions and benefits, improved governance procedures and access to bank accounts, accounting services and legal advice will improve their services and ability to meet the needs of their members. However, the process of formalization requires the support of governmental as well as nongovernmental agencies and international donors. For example, mutual aid associations need assistance in accessing bank accounts and introducing accounting and record-keeping procedures. Although the limitations of formalization should be recognized, it can help address the challenges facing mutual aid associations today. This chapter begins with a discussion of some of the challenges facing mutual aid associations. In addition to the challenges of governance and administrative inefficiency which were mentioned earlier, mutual aid associations need to respond to the forces of individualization and modernization that are undermining cultural values of cooperation and mutual obligation. Another problem is that many people who would like to belong to mutual aid associations are so poor that they are not able to make regular contributions. The formalization of mutual aid and its transformation into microinsurance is a potentially viable response to these challenges. While microinsurance also faces challenges, the evolution of mutual aid associations into more formal microinsurance organizations can contribute to the effectiveness of grassroots social security in the developing world.

Challenges to mutual aid One challenge that is frequently mentioned in the literature concerns the impact of modernization. Many studies have claimed that mutual aid in the developing world is being undermined by the forces of urbanization, industrialization and rapid social change. As younger people migrate to the towns, children and elders in the rural areas are left without adequate support. Scholars also point out that modernization has weakened the values of mutual obligation that characterize non-formal welfare systems. This problem has been exacerbated by the ascendance of an ethos of individualism that is insensitive to the demands of collective action. Both factors have implications for mutual aid and income protection in the developing world. The negative effect of rapid social change on mutual aid has been noted many times in the past. Already in the 1960s, Clifford (1966) observed that traditional African families and communities were unable to cope with the social needs and problems created by modernization. Indigenous systems of care, he believed, were gradually disintegrating. Cockburn (1980) pointed out that traditional forms of support were being eroded as increasing numbers of rural people, and especially young people, migrated to the towns. Consequently, there were fewer able-bodied adults in the rural areas to care for those in need. At the same time, urban migrants were isolated from the support networks of the village and had to respond to adversity on their own. Although these views are countered by Little’s (1965) findings

Challenges to mutual aid 31 that mutual aid activities are quite extensive among urban migrants, many experts agree that the forces of industrialization and modernization are undermining traditional social supports. A recent analysis of the challenges facing elderly people in Africa by Apt (2002) confirms that traditional systems of care are being weakened. Although many elderly people are still cared for by their extended families, the trend towards smaller, nuclear families, and greater social mobility among the young are limiting the effectiveness of the traditional system. Similarly, Azaiza (2007) reports that there has been a gradual shift to an individualistic culture among the Arab community in Israel which is debilitating traditional social support networks. Some scholars have argued that poverty and other adversities such as the AIDS pandemic pose an equally serious challenge to mutual aid. Many people who wish to participate in mutual aid associations cannot do so because they are too poor. A study of mutual aid in Uganda (Kasente et al., 2002) found that many members of mutual aid associations have difficulty in making regular contributions because their incomes fluctuate dramatically and they are often called upon by relatives to help them in times of need. The situation has been exacerbated by the AIDS pandemic and the increase in the number of orphans and dependent elders who need support. In addition, because many members of mutual aid associations are poor, their contributions are small and the benefits they receive are ‘woefully inadequate’ (p. 180). Another example of this problem comes from de Bruijn (1994) whose research into social support networks among the Fulbe pastoralists of the Sahelian region found that drought, loss of livestock and poverty have severely limited the capacity of these nomadic people to help each other, even though their mutual aid activities are rooted in centuries-old traditions of social reciprocity. Her poignant account suggests that even the most culturally embedded mutual aid practices can be enfeebled by the destructive force of widespread poverty. A more recent account of the role of extended families in caring for children in rural China by Shang (2008) makes a similar point. Although orphans and other dependent children are still being looked after by relatives, many caregivers face serious financial difficulties when assuming the additional costs of nurturing, housing and educating these children. Other challenges facing mutual aid associations are arguably more prosaic but are nevertheless of concern. One of these relates to the tendency among people in many cultures to pursue their self-interest at the expense of others and to manipulate collective action to their own advantage. As was pointed out earlier, the notion of self-interest as theorized in neoclassical economics has been used by economists to analyse mutual aid. Their studies are based on the premise that poor people are rational and driven by the same motivation to pursue their interests as are middleclass and wealthy people. While some of this research has optimistically suggested that the prevalence of rationality among the poor makes it possible to utilize modern insurance to address their needs, the same economic models have also shown that some poor people, acting rationally, may exploit and even abuse insurance. Several examples of how this may occur are given in the literature (Dror and Jacquier, 1999; Loewe, 2006). As with commercial insurance, mutual aid may create a moral hazard

32 James Midgley by which some individuals fail to take adequate steps to manage risk in the knowledge that they are protected by others. In addition, in knowing that they will be assisted, they fail to take adequate precautions to prevent risks from occurring. They also tend to rely excessively on cooperative activities. The free-rider problem may also occur by which some individuals benefit from mutual aid without contributing to local cooperative activities efforts. Another problem is adverse selection whereby some individuals actively seek protection knowing that the risks they face are especially great. Unlike modern insurance that carefully assesses these and other risks before issuing policies, traditional mutual aid practices do not incorporate safeguards of this kind. On the other hand, many studies have drawn attention to the apparent ‘irrationality’ of some mutual practices. As was pointed out earlier, Ardener’s (1964) pioneering research into ROSCAs suggested that the division of accumulations on a regular basis is not in fact economically rational since those at the front of the payout queue receive an interest-free loan and derive greater benefit than those at the back of the queue. Of course, this problem has been recognized by ROSCAs which use lotteries or auctions to ensure greater equity in transactions. Collins and her colleagues (2009) also found that some of those whom they interviewed made financial decisions that could be construed as irrational. Many poor people utilize the local moneylenders and collecting bankers such as the esusu, even though these services are expensive. Similarly, the practice of borrowing from ASCAs or using ROSCAs by people who hold savings accounts at local banks or cooperatives may also seem to be irrational. However, as noted earlier, these ‘irrational’ decisions were viewed as perfectly rational by those who were interviewed. Ardener (1964) also drew attention to the informality and ‘unbusinesslike’ nature of mutual aid practices. Observers have lamented the fact that many associations are haphazardly managed, that records are seldom kept, and that funds are sometimes mismanaged. While the flexibility of mutual aid associations is often said to be a major advantage, their governing committees often have so much discretion that the associations’ funds are often placed at risk and even depleted. These problems are not new. More than half a century ago, some observers criticized the way in which mutual aid associations were subject to the whims of their leaders, and suffered from fraud and embezzlement (Isong, 1958). A more recent survey of burial associations in Zimbabwe (Dhemba et al., 2002) confirmed that these problems have not been solved. The survey found that many members were dissatisfied by a lack of transparency and that financial reports and minutes of meetings were seldom provided. Committee members did not always consult members on important decisions and some complained that reserve funds were being kept in non-interest-bearing accounts when these funds could have been invested. Some members resigned because they believed their contributions were being mishandled. Ngwenya (2003) reports that in Botswana, many burial associations had failed to submit financial reports to the government’s Registrar of Societies. Although they were officially listed by the Registrar as no longer in operation, many continued to function without statutory oversight. On the other hand, she revealed that many associations did their best to prevent abuse and had developed

Challenges to mutual aid 33 procedures to ensure that claims for funeral expenses were in fact used for this purpose. Some scholars believe that abuse is more likely to occur when associations such as burial or benefit societies exercise wide discretion in decision-making and less likely to occur when operating procedures are clearly defined. Many believe that ROSCAs are far less prone to the mismanagement of funds or defaulting. Ardener (1964) was adamant that defaulting among the members of ROSCAs was extremely rare because the failure to contribute was severely sanctioned. She argued that members would go to extraordinary lengths to meet their obligations. Many others agree, pointing out that since most ROSCAs are small, and comprise family, kin or other members who know each other, defaulting hardly ever occurs. In addition, because most ROSCAs immediately transfer accumulated funds to the recipient, no banking of reserves is required. However, some ROSCAs do in fact accumulate reserves to cover operating expenses and to disburse to needy members or their families in times of hardship. Like burial societies and benefit associations, they are not immune from abuse. In addition, as ROSCAs have become larger and more impersonal, especially in the urban areas, financial management challenges have increased. This problem has plagued commercially operated Chit Funds in India even though they are controlled by statutory regulation. Collins and her co-workers (2009) found that a number of their Indian respondents reported that the ROSCAs they had joined had collapsed because some members had defaulted. A number said they no longer trusted their ROSCA and had withdrawn. There are, of course, other reasons for the collapse of mutual aid associations. Collins and her colleagues report that one South African respondent had lost her accumulated savings in an ASCA because the association’s treasurer was robbed and killed, and all the funds were stolen. Another challenge is that mutual aid sometimes involves family conflicts and other difficult personal issues. Ngwenya’s (2003) study of burial associations in Botswana revealed that acrimonious quarrels often broke out among family members about who should receive and manage the funeral benefit. Burman and Lembete (1995) reported that divorce cases in South Africa sometimes involve bitter struggles in the family courts over the couple’s respective shares in stokvels (as the country’s ROSCAs are known). Although wives do not officially belong to the ROSCA, many contribute, yet they have no claim over the sometimes sizeable sums that accumulate. These problems reflect gender differences in the control of resources in many traditional societies. As noted in the last chapter, Van Leeuwen (2005) found that husbands and other male household members sometimes expropriate funds accumulated by women. Another problem is that receiving benefits from mutual associations may result in a loss of status and respect. This also occurs when members of ROSCAs are compelled to borrow money from relatives or friends to meet their contribution obligations. On the other hand, some members of ROSCAs and ASCAs use these associations to ‘hide’ their savings from family members who have no compunction in asking for assistance. Mutual aid is also challenged by the wider realities of inequality and exploitation that characterize economic relations in many parts of the world. While it may appear

34 James Midgley that mutual aid is a viable income protection approach and a useful method of securing credit and enhancing family finances, the harsh conditions of poverty and deprivation that characterize the lives of those who utilize mutual aid are inextricably linked to these wider realities. Collins and her co-workers (2009) have shown that those who belong to mutual associations also use other sources of credit, including moneylenders and pawnbrokers whose services are driven primarily by commercial considerations. People facing serious adversity may be compelled to borrow at exorbitant rates of interest which may in fact exacerbate their financial difficulties. Although it is true that many poor people are not ignorant of the way in which local moneylenders operate, and may even be quite skilful in managing their loans, it is hardly to their advantage to be exposed to such crass exploitation. This issue is particularly pertinent in cases where members of ROSCAs borrow at high rates of interest from moneylenders to meet their contribution obligations. Okurut and Botlhole’s (2009) study of informal financial institutions in the city of Gaberone in Botswana offers an insightful account of this problem by showing that the activities of burial associations, ROSCAs and cooperative savings clubs are closely meshed with those of local moneylenders and pawnbrokers who not only charge high rates of interest but often use ingenious and dubious methods of securing collateral. Research into sub-prime financial markets in the United States has shown a similar pattern, suggesting that unregulated, predatory lending does not alleviate but in fact contributes to the perpetuation of poverty (Karger, 2005). There is an urgent need for informal credit markets to be more effectively regulated and for poor people to be afforded greater protection against exploitation. The expanding involvement of commercial insurance firms in the microinsurance field will also require greater regulatory intervention. These and other challenges impede the effectiveness of mutual aid and need to be more systematically addressed. Responding to these challenges is also relevant to the formulation of policies designed to strengthen grassroots social security in the developing world. As suggested earlier in this chapter, greater support from governments and other agencies will be required if these challenges are to be addressed. It was also suggested that many of these challenges can be met if mutual aid associations formalize their services by adopting policies and procedures that clarify administrative and governance responsibilities and clearly define contributions and benefits. There is a great deal of evidence to show that this is already occurring in many parts of the Global South. As mutual aid associations adopt formal policies and procedures, and have access to banking, accounting and legal services, they are being transformed into microinsurance.

The role of microinsurance The term ‘microinsurance’ is now widely used in the literature. It is also being employed in policy circles as government officials, aid administrators, the staff of nongovernmental organizations, community activists and even commercial insurance agents now use the term. Although its precise origins are unknown, the term

Challenges to mutual aid 35 seems to have come into use during the 1990s as several governments and nongovernmental organizations in the developing countries adopted the insurance principle to provide health services to poor people. Although associated initially with health care, the use of the prefix ‘micro’ was obviously influenced by the adoption of the terms ‘microfinance’, ‘microcredit’ and ‘microenterprise’, particularly by the Grameen Bank. The founder of the Bank, Muhammad Yunus, had been very successful in popularizing these terms in development circles, and, following the award of the Nobel Prize to Yunus and the Bank in 2006, the term is now well known by the general public. Another influence was the adoption of the term by economists such as Townsend (1994) and Morduch (1999, 2006). Morduch’s contention that a microinsurance ‘revolution’ is taking place and having a major effect on the financial lives of poor people has attracted attention in policy circles. However, the term has not been properly defined. Although there is general agreement that microinsurance involves the pooling of monetary resources by poor people to meet the contingencies they encounter, there are disagreements about which organizations should be designated as microinsurance providers. Some experts use the term loosely as a synonym for all forms of mutual aid, and according to the proponents of this approach, burial societies, ROSCAs and benefit associations can all be classified as microinsurance organizations. Others disagree, insisting that microinsurance involves the adoption of formal operating procedures and the sponsorship of a formal organization. They contend that only some organizations, and particularly nongovernmental organizations (NGOs), should be designated in this way. It is helpful to view these two requirements – formalization and organizational sponsorship – as defining features of microinsurance. The sponsoring organization may be a nongovernmental or microfinance organization, a government agency or a commercial provider. These organizations generally transcend the face-to-face character of much grassroots mutual aid as well as its informality and spontaneity. Microinsurance services are based on clearly formulated policies and procedures involving, for example, formal eligibility and participation requirements and a fixed schedule of premiums and benefits. Microinsurance organizations are governed by appointed or elected management boards and often employ staff who are trained to determine eligibility, maintain records and process claims. Most also have bank accounts, hold formal annual meetings and may have access to legal and accounting services. Many have entered into formal partnerships with governmental organizations, international nongovernmental development organizations and increasingly with commercial firms. This approach to definition is not universally accepted by academics working in the field. For example, Morduch (2006) associates microinsurance with established microfinance organizations such as the Grameen Bank, while Van Leeuwen (2005) believes that the term excludes governmental agencies even though they might provide insurance. Commercial providers are generally recognized as having the potential to provide microinsurance. In addition to definitions that identify the organizational features of microinsurance, Loewe (2006) believes that the term

36 James Midgley should be used to connote insurance schemes that are specifically tailored to the needs of poor people. This means that the product must be affordable and accessible, that the programme should be targeted at low-income individuals and families, and that benefits should provide protection against the risks they face. Policies and procedures for determining eligibility, collecting premiums, processing applications and dealing with other administrative matters should also be appropriate to the needs of those who participate in microinsurance schemes. The term does not, he contends, refer to the small number of participants or a small geographic area which may be served by a microinsurance provider, but rather to the ‘fit’ between the service and the needs of poor people who participate in microinsurance schemes. Although Loewe does not identify the types of organizations that should be designated as microinsurance providers, his definition is very helpful and compatible with the notions of formalization and organizational sponsorship that are used throughout this chapter. It was noted earlier that the term was originally associated with the provision of medical care by both nongovernmental and statutory agencies. Using the insurance principle, these organizations targeted poor families and charged small premiums usually to cover a limited range of health needs. The use of insurance as a funding mechanism has become more popular in recent times as governments around the world have retrenched public spending on health care. Although many were previously committed to the principle of providing free medical services, indebtedness and economic difficulties have severely impeded their ability to do so. As many turned to the International Monetary Fund and the World Bank for aid, the imposition of conditional structural adjustment programmes severely reduced health care budgets and also resulted in the introduction of user fees. As health conditions in many countries have deteriorated, insurance has been viewed as a viable alternative. However, the provision of insurance services by governmental and nonprofit organizations to low-income people pre-dates the adoption of the term microinsurance and its link with health care. Among the oldest is crop insurance. In a landmark study, Savy (1972) reported that the first statutory crop insurance schemes were established in Western countries such as Canada and the United States to help small farmers affected by the Great Depression who could not afford commercial coverage. The governments of several other Western countries introduced similar schemes after the Second World War. The first schemes in the Global South were established in Mauritius in 1947 and in Sri Lanka ten years later. In the early 1980s, the United Nations (1981) reported that twenty-nine countries had established crop insurance schemes but that only eight were in the developing world. Because of fiscal and administrative difficulties, as well as the inability of poor farmers to pay adequate premiums, these schemes have generally not been very successful. Other types of insurance targeted at low-income people have also been introduced in the past but information about these schemes is fragmentary. In the 1950s, some governments in the developing world established limited retirement insurance programmes for plantation workers (ILO, 1961). Later, state-owned insurance

Challenges to mutual aid 37 agencies such as India’s Life Insurance Corporation created a term life or endowment scheme for people on low incomes. Freelance agents are used to recruit participants and collect premiums but many clients have difficulty meeting their payment obligations and problems of fraud are not uncommon (Collins et al., 2009). Another example of a government microinsurance scheme comes from China where the People’s Insurance Company operates a programme whereby those who have deposit accounts are not paid interest but are instead provided with life insurance (Morduch, 2006). The emergence of microinsurance has also been facilitated by the formalization of grassroots mutual aid associations such as burial societies and ROSCAs. The formalization of mutual aid through government regulation has quite a long history. In India, for example, ROSCAs, known as Chit Funds, have been subject to government regulation for many decades although with doubtful success. Despite extensive legislation, cases of fraud and abuse are still reported. Similarly, policies to regulate mutual aid associations are not always effectively implemented. Reference was previously made to the limited success of government attempts to regulate burial societies in Botswana. It has proved difficult to effectively regulate mutual aid in many other countries as well. On the other hand, formalization has also been facilitated by nongovernmental organizations. One example comes from Lewis and Kanji (2009), who note that many local burial societies in Ethiopia known as iddirs have joined with a nongovernmental organization to form cooperative federations covering larger groups of people. This has also fostered the adoption of standard operating procedures, greater efficiency and new opportunities for advocacy for governmental and international donor support. An interesting example of formalization is the Mission Asset Fund in San Francisco which, in addition to its savings and asset-building programmes, assists local people to form ROSCAs, or cestas as they are known, by providing training as well as technical assistance. Most comprise immigrants from Latin American countries. The formalization of mutual aid has also taken place as a number of grassroots associations have themselves adopted formal operating procedures, and gradually evolved into well-established nongovernmental organizations. CARD-MBA, which is discussed in Chapter 4, is just one example of this trend. Known as the Center for Agricultural and Rural Development, the organization began as a small mutual association for landless agricultural workers in the Philippines and it has since grown into a very large and highly organized entity. Another major development has been the adoption of insurance programmes by established nongovernmental organizations. One example is the Self-Employed Women’s Association (SEWA) in India which is discussed in Chapter 3. SEWA was established in the city of Ahmedebad in the early 1970s to organize self-employed women who were involved in a variety of informal sector occupations including home-based quilt and garment making, beedi or cigarette rolling, porterage and street vending. Today SEWA has almost 500,000 members, a savings bank, daycare centres, clinics and schools, and training centres for its workers and staff (Chen, 2008). A major development was the introduction of insurance services by its subsidiary organization known as Vimo SEWA which offers affordable, standard packages

38 James Midgley providing life and sickness cover to its members. It also provides protection against the loss of tools and equipment needed for self-employment and for maternity leave, and the purchase of hearing aids and dentures. Recently, existing microfinance organizations have become major microinsurance providers. The Grameen Bank in Bangladesh, which promotes peer lending to fund microenterprises among groups of poor women, has for many years managed local emergency funds which are used to help members in financial difficulty. These funds are financed through a small levy on loan interest payments. In the early years of this century, the Bank abandoned its hallmark peer-lending model and now provides loans and savings products to individual members rather than to groups. A distinctive feature of this new approach is the attachment of an insurance product such as a term life policy to the loan. Dowla and Barua (2006) report that this programme is extremely popular, particularly among women members who have encouraged their husbands to establish savings accounts that carry term life policies. Other microfinance organizations have introduced similar programmes. Morduch (2006) notes that in its Ugandan operation, the international microfinance organization FINCA charges an additional 0.5 per cent interest on its loans to provide term life insurance. Loewe (2006) found that microfinance organizations in fourteen countries including Argentina, Cambodia, Nicaragua and South Africa also have schemes of this kind. In addition to term life policies, some microfinance organizations have experimented with other types of microinsurance such as health insurance. However, they have often done so with limited success. For example, Smillie (2009) reports that BRAC, another major microfinance organization in Bangladesh, introduced health insurance some years ago but the problems of administering the scheme were so formidable that it was abandoned. Although commercial firms have not been extensively involved in the provision of microinsurance to poor people, this situation is changing as more for-profit providers recognize that there are distinct advantages in catering for poor people at what Prahalad (2005) describes as the ‘bottom of the pyramid’. Originally, many commercial insurance firms were reluctant to be involved owing to the high costs of collecting regular premiums, determining whether claims were legitimate and generally administering insurance programmes that involved small sums of money for relatively small profits. Despite these challenges, some commercial firms have developed appropriate products that cater for the poor. For example, Collins and her colleagues (2009) report that commercially managed funeral parlours in South Africa offer policies and that some of those whom they interviewed in their study had commercial policies as well as coverage through traditional burial societies. A major impetus for the expansion of commercially sponsored microinsurance was the lifting of the prohibition on private insurance by some governments such as India and Bangladesh. In these and other countries, private insurance was nationalized following the Second World War. In Bangladesh, where the insurance market was reopened to commercial providers in the early 1990s, a number of firms now offer low-cost term life insurance policies to poor families. Amenomori (2010) reports that commercial insurance providers such as the Delta Life Insurance Company have enrolled almost a million poor families and that at least seventeen

Challenges to mutual aid 39 other insurance companies are also offering low-cost insurance products to the poor. Collins and her colleagues (2009) found that 19 per cent of those whom they interviewed in Bangladesh had policies of this kind. Loewe (2006) believes that commercial firms are very interested in gaining access to low-income consumers but that they are wary of the risks of expanding into this market. The recent sub-prime mortgage crisis in the United States and Europe has obviously contributed to their sense of trepidation. However, one interesting development is the growing number of partnerships between nongovernment organizations and commercial firms. Van Ginneken (2007) reports that the re-entry of commercial firms into the Indian insurance market has been accompanied by increasing numbers of partnerships between nongovernmental organizations and commercial providers. Community-based women’s groups had been particularly active in fostering partnerships of this kind. In these partnerships, nongovernmental organizations usually recruit customers, manage the collection of premiums and validate claims, while commercial firms invest funds and manage the system. As more partnerships of this kind are forged, it is to be expected that commercial providers will become much more active in the field. The expansion of microinsurance has also been facilitated by the active involvement of international development agencies such as the International Labour Organization. The ILO has worked with a number of governments and nongovernmental organizations to promote the formalization of mutual aid. It has played a particularly important role in fostering partnerships between governments, nongovernmental organizations and commercial providers. It convened an important workshop in Abidjan in the Ivory Coast in 1998 to bring together a number of providers and to discuss ways of expanding microinsurance in the region (Maes, 2003). In 2000, it established a microinsurance working group which has since evolved into the organization’s Microinsurance Innovation Facility which is based at its headquarters in Geneva. The award of a substantial grant to the Facility by the Bill and Melinda Gates Foundation has permitted it to fund a wide variety of demonstration projects around the world. These involve government agencies, nongovernmental organizations and commercial firms. As one of its recent annual reports (ILO, 2008) reveals, these demonstration projects are testing the viability of a variety of products ranging from weather to home contents insurance in different countries.

The challenge ahead The transformation of mutual aid into microinsurance has been greeted with enthusiasm by many who are concerned about poverty in the developing world. Morduch’s (2006) view that microinsurance represents a ‘revolution’ that will help poor families respond more effectively to the risks and adversities they face has been widely shared. Indeed, there is evidence to show that many more poor families are using the microinsurance services of nongovernmental organizations, statutory agencies and commercial providers. The ILO’s Microinsurance Working Group estimates that about seventy-eight million people in the world’s poorest countries

40 James Midgley are now covered by microinsurance schemes (Amenomori, 2010). Similarly, as noted earlier, Collins and her colleagues (2009) found that a small but significant proportion of those whom they interviewed in their study of the financial activities of poor people were covered by microinsurance. Despite these notable achievements, much more needs to be done to expand income protection to the poor of the developing world. In addition to supporting mutual aid associations and facilitating their transformation into microinsurance, it was previously argued that governments should adopt policies to extend statutory protection to those who are excluded from the formal social security system. Policies for achieving this goal are discussed at more length in the concluding chapter of this book. However, it is also important that the limitations of microinsurance be recognized and addressed. While the formalization of mutual aid can help to meet some of the challenges discussed earlier in this chapter, microinsurance is not a panacea. Like mutual aid associations, microinsurance providers also face significant challenges. The moral hazards and similar problems encountered by mutual aid associations also affect microinsurance organizations. Although these organizations are better placed to deal with these problems, procedures for limiting manipulation and abuse need to be vigorously enforced if they are to remain viable. Although microinsurance organizations have adopted formal operating and governance procedures, and many have access to banks, and accounting, auditing and legal services, there is a risk that administrative standards may be challenged by weak leadership and the lack of managerial oversight. Technical assistance designed to enhance administrative performance and ensure that policies and procedures are effectively implemented should be given high priority. Microinsurance organizations also need access to external resources, and particularly to subsidies and financial guarantees. Otherwise, premiums will be excessively high and prohibit the participation of the neediest sections of the population. As reported earlier in this chapter, government crop insurance schemes in many countries have failed to meet the needs of poor farmers because of excessively high premiums. This is also the case with health insurance schemes in many countries which have foundered owing to unaffordable premiums (Dror and Jacquier, 1999). Loewe (2006) is sceptical about the prospect of nongovernmental microinsurance organizations providing adequate health insurance without significant public subsidies. He cites a World Health Organization (WHO) study which found that the vast majority of microinsurance health insurance schemes were not fiscally viable. The challenge of financing health insurance for the poor can be illustrated with reference to a major initiative known as the Yeshasvini Health Insurance Scheme in the state of Karnataka in India (Kuruvilla and Liu, 2007). Established by a local nongovernmental organization in partnership with the state government in 2003, the scheme is intended to be self-financing but it has in fact required significant public subsidies to remain viable. The growing involvement of commercial providers in the microinsurance field also poses challenges. Obviously, commercial insurance firms are motivated by the prospect of making profits. This does not, of course, mean that they necessarily do so at the expense of providing quality services. If they did, their business would

Challenges to mutual aid 41 ultimately collapse. Nevertheless, there is a legitimate concern that the goal of maximizing profits is incompatible with providing appropriate services to poor people. Although neoliberal scholars such as de Soto (1989) and Prahalad (2005) believe that integrating the poor into a vibrant capitalist system offers the best prospect of alleviating poverty, three decades of vigorous marketization have exacerbated what Midgley (1995) called the ‘distortions’ that characterize the development process in many parts of the world Unfortunately, capitalist development has disproportionately benefited business corporations, financial speculators, and those with high incomes and wealth, and inequality has increased significantly as the poor have been left behind. The experience of microfinance is salutary. There is evidence to show that microfinance services directed at the poor have become excessively commercialized and that their commitment to poverty alleviation has been undermined. Schmidt (2009) reports that some microfinance organizations in Latin America that have commercialized are no longer concerned with poverty alleviation. Similarly, AllenMills (2009) has questioned the Grameen Bank’s commercial ventures and involvement in a number of for-profit ventures in China and Mexico which, he contends, detract from its primary purpose of meeting the needs of the poor. These developments have produced growing concern in microinsurance circles about the risks of commercialization. Other critics (Midgley, 2008; Roy, 2010) have also questioned the claim that microfinance makes a significant contribution to poverty alleviation. In addition, as Churchill (2008) points out, some commercial microinsurance providers are already acting in their own interests and those of their agents instead of meeting the needs of the poor. Steps need to be taken to address this problem and to ensure that microinsurance does in fact serve those who are most at risk and who are least able to cope with adversity. This issue will be revisited in the concluding chapter of this book.

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Challenges to mutual aid 43 Morduch, J. (2006). ‘Microinsurance: The Next Revolution?’ In A.V. Banerjee, R. Benabou and D. Mookerjee (eds), Understanding Poverty. New York: Oxford University Press, pp. 337–356. Ngwenya, B.N. (2003). ‘Redefining Kin and Family Social Relations: Burial Societies and Emergency Relief in Botswana.’ Journal of Social Development in Africa 18(1), 85–111. Okurut, F.N. and Botlhole, T. (2009). ‘Informal Financial Markets in Botswana: A Case Study of Gaberone City.’ Development South Africa 26(2), 255–270. Prahalad, C.K. (2005). The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits. Upper Saddle River, NJ: Wharton School Publishing. Roy, A. (2010). Poverty Capital: Microfinance and the Making of Development. New York: Routledge. Savy, R. (1972). Social Security in Agriculture and Rural Areas. Geneva: International Labour Office. Schmidt, R.H. (2009). ‘Microfinance, Commercialization and Ethics.’ Poverty and Public Policy 2(1), 99–137. Shang, X. (2008). ‘The Role of Extended Families in Childcare and Protection: The Case of Rural China.’ International Journal of Social Welfare 17(3), 204–215. Smillie, I. (2009). Freedom from Want: The Remarkable Success Story of BRAC, the Global Grassroots Organization that’s Winning the Fight against Poverty. Sterling, VA: Kumarian Press. Soto, H. de (1989). The Other Path: The Invisible Revolution in the Third World. New York: Harper & Row. Titmuss, R.M. (1971) The Gift Relationship. London: Allen & Unwin. Townsend, R. (1994). ‘Risk and Insurance in Village India.’ Econometrica 62(4), 539–592. United Nations (1981). Crop Insurance for Developing Countries. New York: UN. van Ginneken, W. (2007). ‘Extending Social Security Coverage: Concepts, Global Trends and Policy Issues.’ International Social Security Review 60(2/3), 39–59. Van Leeuwen, I. (2005). Gender and Microinsurance. The Hague: Institute of Social Studies.

Part II

Case studies of microinsurance in Asia

3

An analysis of India’s social protection system for low-income populations Mariko Okamoto

Since independence from British rule, India’s national five-year plans have emphasized poverty reduction as a major goal. At the same time, central and state governments have shown their commitment by making a variety of programmes available to poor and vulnerable people. Example include the National Social Assistance Programme, which provides social security benefits for the poor, and also the Food for Work programme, which brings temporary relief to the unemployed by providing food in exchange for labour. However, many of these programmes are targeted only at narrowly defined groups or politically designated segments of the population, such as scheduled castes and tribes. Moreover, given the government’s limited administrative capacity for managing poverty relief, it is not uncommon for the local delivery of services to be sidelined since operations are often ultimately channelled through village committees called panchayats, which are often controlled by local elites. Consequently, as Dreze et al.(1998) pointed out, social protection programmes for the poor often fail to reach the most needy section of the population. Commercial and public insurance providers offer a variety of plans such as life insurance, accident insurance, unemployment insurance and pensions. However, these schemes cater mostly for government officials, employees of state-run enterprises and staff at large private firms. The bulk of the population, consisting of informal sector workers and the self-employed, are excluded from the benefits of the formal safety net and cope as best they can with adversity. In addition, the government has been unable to invest adequately in an infrastructure that would improve people’s preparedness against natural disasters. It also faces constraints in financing rehabilitation and reconstruction programmes so desperately needed in disaster-affected areas. Hence most people are left exposed to risks that would be impossible for individuals to surmount through personal effort alone. In India, people have traditionally weathered risk by relying on networks of family members, distant relatives and caste communities, and many rely on local patron–client relationships for help. However, as Morduch (1999) notes, these informal mechanisms of mutual support are not always dependable and have, in fact, declined in effectiveness as urbanization and the prevalence of nuclear families have increased. When the poor are short of cash for consumption – a risk they face on a daily basis – they borrow money in order to avoid deprivation and protect the

48 Mariko Okamoto survival of the household. However, they may or may not be able to borrow from a relative or a neighbour. Those who borrow from local moneylenders are likely to fall into a vicious cycle of lasting indebtedness owing to the exorbitant interest they have to pay. In addition, many poor people find it nearly impossible to save money to guard against risks owing to the high deposits required for saving accounts, or the lack of local banks. These and other factors prevent many poor people from availing themselves of banking services. On the other hand, saving or storing cash at home is unsafe in poor neighbourhoods. Both microfinance and microinsurance have recently emerged as ways to address the vulnerabilities experienced by low-income people. Microfinance comprises financial services for low-income people specifically organized around the exchange of small sums of money. It is designed to help poor people reduce their risk of falling into destitution by enabling them to borrow without collateral. Microfinance in India has evolved over the past three decades and is now well developed. Recently, microfinance institutions have also been providing microinsurance. Whereas low-income people have previously been unable to access insurance schemes, they have found new security in microinsurance, thus giving rise to a rapidly expanding field which plays an increasingly important role in many people’s lives. This chapter reviews the development of microinsurance in India, and then examines the way microfinance organizations made microinsurance possible. This analysis will reveal how these organizations have effectively recruited and built up their membership. Particular attention will be paid to how these institutions encouraged their members to become actively involved to overcome difficulties that would otherwise hamper the extension of insurance schemes. The chapter concludes with a brief discussion of some policy implications.

Social protection through microfinance In the mid-1970s, a number of programmes delivering financial services to selfemployed workers in the informal sector were established. Nongovernmental organizations and women’s cooperatives began offering financial services with limited coverage and, as the government increasingly channelled funds through these organizations, financial services rapidly expanded to include credits for India’s growing number of mutual aid associations engaged in group-based savings. Today, even ICICI Bank, the largest commercial bank in India, participates in microfinance. Microfinance has spread rapidly not only because it provides small amounts of credit for income-generating activities but because it has enabled poor households to open savings accounts. Low-income households need savings to draw from as much as they need credit when facing difficulties. Fully aware of this need, microfinance providers began to introduce savings accounts to provide liquid assets for the rural poor. It did not take long for providers to introduce savings accounts that kept account holders positively prepared for life-cycle events such as school enrolment and marriage. Microfinance organizations currently serve a variety of functions: they offer secure savings facilities to the poor, they empower individuals

India’s social protection system for the poor 49 with the means to manage their cash needs and they provide people with credit that can be used to stabilize household economies or start new income-generating ventures. In the 1990s, Indian microfinance organizations that were already providing services for the poor took on the new challenge of providing microinsurance. Since then, they have served poor households with insurance policies and programmes for mitigating shocks such as a death in the family, the hospitalization of a primary wage earner, damage by fire and other needs that could not otherwise be resolved through short-term borrowing. In addition, private insurance firms across India have also begun to participate in microinsurance. Table 3.1 lists a selection of Indian microinsurance providers that have enrolled a sizeable number of policy holders and adopted formal organizational structures and operating procedures. While the poor have not yet been incorporated into the government’s social security system on an appreciable scale, private companies and nongovernmental organizations have been rising to the challenge of providing them with the means to manage their own risks. As a result, microinsurance schemes available to lowincome populations vary significantly according to the nature and approach of the insurance providers. From life insurance to comprehensive welfare services Microfinance organizations have been major contributors to the extension of microinsurance services. Their first concern was helping families deal with the death of primary wage earners where the wage earner had been burdened by outstanding debt. Microfinance organizations were aware that these families, bereaved of their breadwinners, are at great risk of falling into destitution. Hence, not long after credit operations began, these institutions introduced policies for writing off debt. The Self Employed Women’s Association (SEWA), a forerunner of microinsurance in India, tried to cover all of its members by taking out a group life insurance policy in the early 1980s with the government’s Life Insurance Corporation of India (LIC). In 1993 it ended compulsory coverage for its members, and implemented a system whereby each member could decide whether or not to purchase the policy. While the number of policy holders initially dropped because of this change, the decline proved to be temporary and the numbers of policy holders recovered in 2001, and continued subsequently to rapidly increase (Figure 3.1). In response to members’ needs, many microfinance organizations have expanded life insurance coverage to include household members as well. The members of these organizations are mostly married women and it is not unusual for their husbands to undertake economic ventures financed by borrowed money. When husbands die, the deceased’s family often excludes widows from inheritance, and this explains why widowhood is a major cause of destitution among rural women. For these reasons, microfinance organizations have begun to provide life insurance that, with the payment of an additional premium, covers members’ husbands as well. In addition, organizations such as SEWA also cover their members’ children in its life insurance plans (Vimo SEWA, 2007).

SEWA Affiliate

Private insurance firm

Credit cooperative

Microfinance NGO

Religious corporation with microfinance services

District federation of SHGs

Health care trust for the state federation of farmers cooperatives

1.Vimo SEWA

2. Tata-AIG

3. SKS Microfinance

4. Village Welfare Society

5. SKDRDP

6. Zilla Samakhya of Indira Kranti Patham (IKP) programme

7. Yeshasvini Trust

Tabulated from the following sources: 1. http://www.sewainsurance.org/vimosewa5.htm,(2007/08/08). 2. Roth and Athreye (2005). 3, 4, 5, 7. Microinsurance Awards Secretariat (2007). 6. Kalavakonda (2006).

Notes: 1 Approximate figures 2 General insurance in India includes property and health insurance. 3 Policy holders receiving benefits numbered 877,000 in 2007.

Type of organization

Organization

Table 3.1 Microinsurance providers for the poor

Insurance provider with support from the Karnataka state government

Insurance provider in partnership with an insurance firm

ICICI Lombard agent

ICICI Lombard and LIC agent

Life Insurance Corporation (LIC) agent

Insurer

Insurance provider in partnership with four private insurance firms

Role in insurance provision

Health

Life

General

Life General

Life

Life

Life General2

Type of product

1,855,000 [2007]

1,600,000 [2006]

403,800 [2007]

790,300 [2007]

1,276,0003 [2007]

34,100 [2005]

139,800 [2007]

Policy holders 1 [year]

India’s social protection system for the poor 51 180

25.00 20.00

140 120

15.00

100

%

Policy holders (’000)

160

80

10.00

60 40

SEWA members and their husbands SEWA members’ children Policy holders (%) in total membership

5.00

20 0.00 06

05

20

04

20

03

20

02

20

01

20

00

20

99

20

19

19

98

0

Figure 3.1 Policy holders and their percentage of the total membership Source: Prepared from the information available in Shah and Shinha (2005) and http://www.sewa. org/About_Us_Structure.asp.

Another example of the development of microinsurance by a microfinance organization is Sahara India which initially provided credit to its members in the early 1980s for the purchase of durable consumer goods. It did so through daily and weekly instalment savings plans. By the end of the 1990s, this organization had managed to offer a package of services, including instalment savings and life insurance, in rural areas. Its business spread through agents such as dispensaries and similar establishments capable of maintaining close contact with local clientele. International development agencies were also aware that microinsurance would be a logical next step following the popularization of microfinance and some began to advocate for the introduction of these services. However, local microfinance organizations had already planned to establish comprehensive microinsurance schemes based upon their assessment of the financial needs of their members. For example, SEWA recognized that its members faced numerous hardships and it sought to develop appropriate risk protection schemes. From a study it conducted in 1977, SEWA discovered that death and sickness were two leading causes of microfinance default. In response, it introduced a new microinsurance programmes which was designated by the term ‘SEWA Social Security’. This programme was subsequently renamed Vimo SEWA. Later, SEWA launched local preventive health care campaigns and organized training programmes for midwives and primary health care workers. In 1984 it also began a community-based primary healthcare programme. To ensure the effectiveness and sustainability of this programme, 400 midwives and health care workers were trained and licensed to provide elementary medical care. In addition, sixty SEWA-trained community health workers and local leaders, called aagewan, and 100 organizers formed a cooperative called Lok Swasthya Mandali. The cooperative now manages the whole health care programme, deploying trained personnel to some 400 health centres and dispensaries across the country.

52 Mariko Okamoto The accumulation of resources and experience has been a prime force behind the rapid expansion of SEWA’s insurance schemes among the rural poor. The organization now provides packaged policies that include insurance on property and accidental death, and it has also started a pilot project offering drought insurance in collaboration with a commercial provider, ICICI-Lombard. Today, SEWA continues to develop insurance schemes that better address the actual risks faced by the poor.

Growth and diversity among microinsurance providers India is home to a large number of microfinance organizations, although many operate on a scale that is not nearly as large as SEWA’s. In fact, growing numbers of nongovernmental organizations became involved in microfinance when the government introduced regulations allowing these organizations to take a small commission wherever they assisted self-help groups of ten to twenty members to obtain small loans from the state-owned National Bank for Agriculture and Rural Development. By 2005, over 1.6 million self-help groups, with a total of 9 million members – that were all linked to the Bank – were involved in savings and credit activities. Many nongovernmental organizations have gone into the microinsurance business. Typically, the number of policy holders they carry varies from several thousand to hundreds of thousands of people. Nongovernmental organizations often act as agents for government-owned or private insurance companies. One reason for the rapid involvement of nongovernmental organizations in the field of microinsurance was a 2002 regulation issued by the government of India’s Insurance Regulatory and Development Authority (IRDA) entitled ‘Obligations of Insurers to Rural and Social Sectors’. The Authority’s regulations set targets for insurers by specifying values for year-on-year growth in the numbers of policy holders, and in the percentage of cards issued or premiums paid against total target coverage for the first five years of operations (See Table 3.2). This move was part of a broader effort since the late 1990s to reform the insurance sector. Before reform had begun, insurance in India had only been available through state-run companies, which essentially meant that insurance benefits reached few people other than government officials, the employees of state companies and members of the middle class. Although insurance companies later decided to offer group policies and other schemes targeted specifically at poor people, this shift did not take place on their own initiative. Instead, they tended to wait for nongovernmental or microfinance organizations to pave the way. In addition to requiring that insurance providers extend coverage to rural communities, the Insurance Regulatory and Development Authority introduced standards and minimum requirements for insurance businesses. This was required after the national government adopted a policy to expand the commercial insurance market by encouraging both domestic and foreign private firms to operate in the country. Private insurance was abolished in the 1950s and commercial firms were only permitted to re-enter the insurance market some thirty years later. A number

India’s social protection system for the poor 53 Table 3.2 Targets required for insurers Sector

Type of insurance

Target

1st year

2nd year

3rd year

4th year

5th year

Social sector

All types

Number of policy holders

5000

7500

10,000

15,000

20,000

Rural Sector

Life insurance

Per cent to total cards issued

7

9

12

14

16

General insurance

Per cent to total premiums paid

2

3

5

5

5

Note: The ‘social sector’ includes the unorganized sector, the informal sector and economically vulnerable classes living below the poverty line as well as other persons unable to secure gainful employment, both in urban and rural areas. Source: Prepared from the descriptions in IRDA (2002).

of Indian firms launched joint ventures with international firms that were attracted by these new market opportunities. These joint ventures include TATA-AIG and ICICI-Lombard. TATA-AIG was formed by India’s TATA industrial conglomerate and the US-based international insurance firm AIG. Many of these commercial providers sought to collaborate with nongovernmental organizations and cooperatives that already had a large clientele, since the members of these organizations represented a large pool of potential customers. As a result of these regulations, many nongovernmental or microfinance organizations found themselves in an advantageous position from which they could better negotiate terms with private providers. The regulations introduced by the Insurance Regulatory and Development Authority have been effective and have facilitated private sector involvement and the growth of the microinsurance industry. Increasing numbers of private insurance companies are now providing microinsurance services often in collaboration with nongovernmental organizations. As mentioned earlier, one of these is TATA-AIG. This firm has worked with local nongovernmental organizations to train what are known as ‘micro-agents’ who recruit customers, collect premiums and act as a first point of contact between customers and the firm. Similarly, India’s ICICI Bank, which is the largest private bank in India, joined forces with international insurance companies to create two new insurance firms – ICICI Lombard and ICICI Prudential – to develop and bring microinsurance policies to the market that combine life insurance with property and health insurance. These developments show that private companies are not simply complying with their legal obligations to extend services to rural communities but are actively working to expand their business. They appear to be pursuing strategies for reaching markets located at what Prahalad (2005) calls the ‘bottom of the pyramid’. This includes India’s potentially huge rural insurance market. It should be possible, as

54 Mariko Okamoto he points out, for businesses to operate both soundly and successfully while incorporating consumers living below the poverty line. This can be done by providing services that match the actual real needs as well as the resources of poor people. This strategy is believed to be viable since the poor are, over the course of time, likely to improve their living standards and ultimately consume greater volumes of goods and services at higher prices. The success of microfinance in India and other countries seems to support Prahalad’s premise and has also fuelled commercial interest in investing in microinsurance in India. State government schemes State governments are also playing an increasingly active role in the provision of microinsurance. In 2000, the state government of Andhra Pradesh launched a microinsurance scheme as a part of its rural poverty reduction project named Indira Kranti Patham (IKP). This programme was established in cooperation with the World Bank. Since risk reduction was an explicit goal of the project, the inclusion of an insurance scheme was recognized as an important component. Locally based self-help groups involved in savings and credit activities, comprising between ten and twenty women, form an essential part of the programme. These groups are stable and productive and have empowered women. The subsequent increase in the number of groups in the state was also facilitated by the involvement of a private bank in the project. Currently, more than 800,000 self-help groups, organized into 860 village-level federations called Mahila Mandals, operate in twenty-two districts (Zilla) in the state. The Zilla Samakhya, or district-level federation, coordinates the activities of these groups. It purchases a group insurance policy in the insurance market through bidding, and is responsible for marketing insurance products, issuing insurance certificates, handling claim applications, approving claims, delivering payments to beneficiaries and keeping business records. This system of marketing and delivery to a large number of participants guarantees that low-income households have access to life insurance at lower costs. The Life Insurance Corporation of India (LIC), a public sector insurance firm, provides reinsurance and the government subsidizes premium payments. Another example of the involvement of state governments in microinsurance is the Arogya Raksha scheme which was established by the Andhra Pradesh state government to provide health insurance for individuals living below the poverty line. Through this programme parents who agree to use family planning are entitled to five years’ medical insurance with an annual coverage of up to Rs4,000 (about US$87 in 2008) for hospitalization. Their children are also covered. To fund the scheme, the state government pays a premium of Rs75 per person to a state-owned insurance company (Ahuja and Narang, 2005). Similar microinsurance schemes have been established in other parts of India as well. For example, health insurance for poor farmers in cooperatives was established by the Yeshasvini Trust with help from the Karnataka state government in 2003 (Radermacher et al., 2005). Each cooperative member pays an annual premium of Rs60 to the Foundation, which is subsidized by a state government

India’s social protection system for the poor 55 contribution of Rs30 per policy holder. As shown in Table 3.1, the scheme currently covers more than 1.8 million farmers and their families throughout the state of Karnataka.

Characteristics of microinsurance Microinsurance products must be developed and marketed in ways that best suit the characteristics as well as the needs and resources of low-income households. Microfinance institutions and other nongovernmental organizations have sought to develop insurance products that meet these requirements and to extend coverage to the poor. The various providers mentioned earlier have designed different types of insurance products with premiums and benefits that are appropriate to the needs and circumstances of poor communities in India, and they have devised effective methods for collecting premiums. Types of insurance Life insurance is by far the most popular product in the microinsurance business but, over time, the range of products has increased to cover health, accidents and natural disasters as well. However, there are limitations in these different types of insurance. For example, the health insurance plans of Vimo SEWA and the Yeshasvini Trust, which were mentioned previously, only provide insurance for surgery and hospitalization, while common illnesses are not covered. These differences reflect the different priorities, needs and resources of the members of microfinance and nongovernmental organizations. For example, while few women members require accident insurance, SEWA provides accident insurance in its policy package because many of its members are construction workers or street vendors who are exposed to the risk of accidents. Different types of life insurance plans are offered by microfinance and nongovernmental organizations. These include standard policies such as lifetime insurance, term life insurance and endowment policies whereby policy holders receive a lump sum benefit at the expiration of the policy. Another type of policy which has become quite popular is credit-linked life insurance. Should policy holders with a loan die before the loan is paid off, the balance of the loan is settled and in many cases the deceased’s dependants also receive benefit. These different types of policies are designed to meet the different needs of different policy holders at different stages of the life cycle. Many people who do not have pension plans choose endowment policies in order to provide for their spouse and children. Premiums and benefits In a conventional life insurance scheme, once consumers have chosen a life insurance policy with the benefits they desire, they are individually assessed for a premium that takes their age and other circumstances into account. Obviously, lowincome consumers who use microinsurance life insurance schemes prefer simple

56 Mariko Okamoto products with lower premiums and limited benefits. Simple products also reduce marketing costs on the part of insurance providers. Premiums in these schemes typically run from approximately Rs50 to Rs550. The former rate is low because it is subsidized by the government. The higher rate is typical of SEWA’s family policy. On average, however, most providers set their annual life insurance premium rate at around Rs120. This amount is equivalent to 1 per cent or less of the annual income of most poor households. Generally, benefits range from Rs1,500 to Rs25,000. To meet the demand for simple products, many commercial insurance firms market policies that have a standard premium with variable benefits depending on the age and circumstances of the policy holder. For example, a younger and healthy policy holder will pay the same premium as an older policy holder but receive a higher death benefit. However, in many cases, the premium amount is actually set by field agents who contract with the firm. Microfinance and nongovernmental organizations have also introduced a simple range of policies, and often only a single product is offered. This is done for both marketing and administrative purposes. It is important that potential customers understand the product and that misunderstandings are avoided. Similarly, the administrative demands of managing a wide range of products are often beyond the capacity of nongovernmental organizations. An example of the effective use of simplification is SEWA which offers only two levels of policy coverage to its members. Premium collection Unlike workers in regular wage employment, many farmers face seasonal fluctuations in income. This is also the case with many self-employed people who have unstable sources of income. These people are quite likely to fall behind in premium payments and lose their insurance coverage. In addition, many policy holders tend to place a low priority on paying their premiums in times of financial difficulty because they do not fully appreciate the consequences of losing insurance cover. However, when they discover that their policies have lapsed, they often lose confidence in microinsurance providers. For this and other reasons, special efforts should be made to maintain premium payments and insurance protection among low-income clients. Various techniques are used to achieve this goal. The importance of having affordable and simple policies has already been mentioned. In addition, premiums should preferably be linked to loan repayments or savings deposits. Many microfinance institutions collect premiums in small instalments when members repay their loans or automatically deduct the premium when members deposit funds into their savings accounts. Nevertheless, some members facing financial difficulties may make their loan repayment but avoid paying the premium. For this reason, SEWA recommends that its members set up an arrangement whereby premiums are automatically deducted from the interest they earn on savings accounts. In addition, some nongovernmental organizations have developed novel forms of premium payment. The dairy cooperatives in the state of Gujarat allow premiums

India’s social protection system for the poor 57 to be paid in kind (in the form of milk) while sugar cane cooperatives in Maharashtra state deduct the insurance premium from the price it pays its members for the sugar cane they produce. In the case of the Indira Kranti Patham (IKP) programme discussed earlier, the existing four-tier organizational structure of self-help groups serves as the vehicle for premium collection. The procedures for collection therefore require little additional cost to either self-help group members or the partner insurance company, although the number of the participants is very large. The individual members submit insurance premiums to their self-help groups at regular meetings and each group then transfers the collected premiums to the subdistrict federation through its village organization. Sub-district federations in turn each remit premiums by cheque to the appropriate district-level Zilla Samakhya bank account.

Challenges of microinsurance Microinsurance services are subject to a number of problems rooted in the very nature of insurance itself. First, insurance is a contract that promises future benefits in exchange for the payment of premiums – a transaction which requires that policy holders have confidence in their insurers. Second, microinsurance that targets lowincome populations is likely to entail higher policy costs. There are several reasons for these extra costs. First, in the rural areas, villages are widely scattered, making door-to door sales difficult. Second, when compared to middle-class families, the assets held by poor households are generally of lesser value and not always worth insuring. Third, because many poor people have difficulty understanding the concept of insurance and the way it works, they often reject it out of hand. In the case of life insurance, another factor is a reluctance to talk about the prospect of death. Fourth, high levels of illiteracy among the poor mean that the processing of contracts and assessing claims is a time-consuming task. When responding to these challenges, microfinance and nongovernmental organizations have many advantages. Many of these organizations have built relationships of trust with potential policy holders because of their work in the microfinance field. They have extensive experience of organizing and supporting the poor, and the technical knowledge they have acquired gives them a natural advantage when dealing with complex issues. Many also maintain close contact with their members through providing services other than microinsurance. For these reasons, promotion and marketing, premium collection, claims processing and other tasks can be done at relatively low cost. Moreover, many of the staff at these organizations know their members well enough to be able to detect and limit false claims. Management, marketing and claims processing Insurance providers pool risks in order to meet the costs of benefits. To sustain stable business operations, they therefore require a sizeable number of policy holders. Furthermore, many of these providers employ high-salaried professionals such as actuaries and specialists in law and investment. In addition, they must

58 Mariko Okamoto have capital reserves. The reserve requirement for insurance companies in India is quite high at Rs1 billion (approximately US$2.1 million). Although SEWA had tens of thousands of policy holders, it could not meet this requirement to become a full-fledged insurer. Instead, it chose to enter into contractual arrangements with four insurance firms to develop and market policies that were acceptable to its members. These contracts expressly stipulate that Vimo SEWA is responsible for routine administrative tasks including recruiting members, drafting insurance contracts and processing claims. The four firms found the partnership to be advantageous in that it increased their numbers of policy holders, although they had to make some concessions to meet SEWA requirements. However, since commercial insurance firms had not established a presence in the low-income insurance market, this agreement worked to their advantage. The potential market is huge; thus allowing microfinance and nongovernmental organizations to act as agents is a convenient solution. In fact, insurance companies in India now increasingly pay commissions to cooperatives and nongovernmental organizations to market and deliver insurance services. These services include product promotion, assisting in drafting contracts and processing claims. The arrangement is not unlike that which many microfinance organizations have entered into with banks. In these cases, microfinance organizations take a margin from the interest charged by banks. However, some commercial providers, such as TATA-AIG, have decided to develop their own networks of marketing agents (Roth and Athreye, 2005). From their perspective not every nongovernmental organization is capable of serving as an agent. Nor could some of them be fully trusted with this task. Many of these organizations prioritized the repayment of loans over the payment of premiums when borrowers experienced difficulties in meeting their obligations. Some chose to spend more time providing services to their members rather than collecting premiums. In the state of Andhra Pradesh, TATA-AIG developed its own marketing model by employing its own micro-agents. It collaborated with trusted local nongovernmental organizations and brought them on board as consultants. These organizations were then contracted to recruit reliable women who could work as micro-agents. These women were assigned to market and collect premiums which were paid to the local branch of the nongovernmental organization. They worked in teams of five and team leaders were licensed to be legally qualified as insurance agents. In addition, these teams registered under the state’s Society Act as nongovernmental workers. As compensation, the micro-agents were given performance-based rewards such as home appliances and this depended on the number of policies they sold. While some commercial insurance firms are developing their own microinsurance schemes to meet the needs of poor people, a few nongovernmental organizations have become for-profit organizations. One example is the microfinance institution SPANDANA which began offering microinsurance services after becoming a partner-agent for the Life Insurance Corporation of India (LIC) which is a government entity. SPANDANA became an independent provider and succeeded in developing and marketing its own life insurance policies. It earned a net

India’s social protection system for the poor 59 profit of 20 per cent of the annual total premiums it received. SPANDANA has done well largely because it is a microfinance institution that requires its borrowers to join its life insurance scheme. This suggests that microinsurance can be a stable source of revenue for microfinance organizations. However, sound management and careful assessment of investment possibilities will be needed if these organizations are to successfully expand into the microinsurance field. Although they do not employ investment experts they have usually acquired a great deal of expertise, which can help them to judge whether particular schemes are likely to be successful. Explaining how insurance works and convincing potential clients of its benefits can be a daunting task, since the promises made in policies are not fulfilled until an indefinite point in the future. Because many people find it difficult to link current payments to future benefits, SEWA and other organizations have attempted to address this problem by holding public ceremonies at which benefits are distributed. By witnessing at first hand the distribution of benefits, members are educated and have a better understanding of how insurance works. The Indira Kranti Patham (IKP) programme in Andhra Pradesh, which was mentioned earlier in this chapter, has been effective in earning the trust of its members. As noted earlier, the state’s twenty-two Zilla Samakhyas, or district-level federations, work closely with self-help groups of women and act as the insurance agents for these groups. Each of the Zilla Samakhyas has close contact with individual women’s groups and ensures they understand how the insurance system functions and how accounting records are kept. It has also standardized its operations and ensured that claims are speedily approved. In addition, because it provides life insurance at comparatively low cost, there is a high degree of member satisfaction. As a result of these efforts, coverage has expanded rapidly, growing to more than two million policy holders by the end of 2007. Processing life insurance claims takes time. To file a claim, applicants must obtain death certificates, or autopsy reports in the case of accidental deaths, and then wait while the claim is verified and the amount of compensation assessed. Lengthy waiting periods are problematic and breed distrust in the insurance system. However, while many commercial insurance firms take two to three months to approve a claim, nongovernmental microinsurance providers generally know the applicants well and need less time to process claims. Many microinsurance organizations have also worked hard to improve their efficiency in claims processing. For example, in 2001, Vimo SEWA required almost three months to process claims but now it takes only two to three weeks to process claims in the rural areas, one week in the urban areas, and one month to approve claims for accidental deaths (Shah and Shinha, 2006). Challenges of health insurance management Compared to life insurance, health insurance is much more complicated and poses a significant challenge to providers. Costs vary and can be high, and claims are submitted with greater frequency. In addition, health insurance entails the direct involvement of third-party medical service providers. For this reason, many

60 Mariko Okamoto microinsurance providers are reluctant to provide health coverage or otherwise do so on a limited basis, restricting payments to hospitalization or other major expenses. In many cases, health insurance is linked to the services provided by local clinics and hospitals either in the public or private sectors. For example, Vimo SEWA currently offers health insurance for hospital admission, but it has been challenged in developing this programme. While it was initially intended that policy holders should pay for their own medical expenses and then apply for reimbursement, it was recognized that those without ready cash would be discouraged from going into hospital. Another problem was that local medical facilities are strained and that the quality of care varies considerably. To deal with these problems, SEWA decided that it would contract directly with approved hospitals and ensure that they meet quality standards. Policy holders requiring hospital admission contact SEWA’s local office where a representative known as the Vimo Saathi or ‘friend of insurance’ makes all the necessary arrangements for their admission. The Vimo Saathi also handles claims with the hospital, checking that services are covered and determining what amount patients can afford under their insurance policies. In this way, the hospital avoids patients’ defaulting on medical bills and also maintains optimal occupancy rates. Although this health insurance scheme is currently only available in the city of Ahmedabad, SEWA is reviewing the possibility of extending it to other areas. It appears that this health insurance scheme is thriving in Ahmedabad, apparently underpinned by an effective healthcare system that SEWA has carefully developed over the years. In addition, as was reported earlier in this chapter, the organization has invested heavily in preventive care. It was aware that high morbidity rates in the city stemmed from unsanitary living conditions and the demanding work that many of its members perform. It has prioritized health education among its members, and has also worked closely with local medical establishments to provide its members with affordable medication and access treatments. As was noted earlier, SEWA also employs its own health care workers and midwives. Their knowledge of local medical services and hospitals is particularly useful, and ensures that the health insurance scheme operates effectively. Moral hazards and covariant risks Insurance firms are likely to be confronted with challenges relating to adverse selection and moral hazard and they have introduced a variety of checks to ensure that these problems are addressed. Moral hazard is a general term that relates to fraud, abuse, free-riding, and other factors that distort the smooth operations of insurance markets. Although microinsurance is rarely fraught with problems of this kind, a number of measures have been introduced by microinsurance providers to contain these problems. One measure is to provide compulsory insurance for all members of microfinance and microinsurance associations, ensuring that all low-risk individuals are included among the policy holders. However, this approach also has problems, since those

India’s social protection system for the poor 61 enrolled in a compulsory scheme may not know which risks they are covered for and how their policy works, resulting in confusion and potential dissatisfaction. As noted earlier, it was for this reason that SEWA abandoned its original compulsory policy. One reason for its success was introducing simple insurance products that could be easily understood by members. It is also important that coverage exclusions be clearly specified. Nevertheless, it is still important that microinsurance organizations carefully review and appraise applications before contracts are signed. Identity fraud is a distinct possibility in India, where birth certificates and other documents are not always available. Most microinsurance organizations now prevent fraud by requiring documentation such as death certificates or autopsy reports. The murders of brides for their dowry, which is not unknown in India, can be averted by encouraging women policy holders to maintain close contact with one another or with the members of their group. It is important that adequate steps be taken to address these and other problems. Failure to do so can be very damaging. For example, the government’s livestock insurance programme has fallen into disrepute owing to many false claims for compensation. Covariant risks occur when an adverse event in a particular area affects a large number of insured people, causing widespread damage and sizeable claims that can seriously affect the insurer’s ability to meet these claims. For this reason, many smaller insurance firms take out reinsurance with larger national or international companies. To date, however, few microinsurance providers have taken this step. One notable exception is the Indira Kranti Patham (IKP) project in Andhra Pradesh, which has secured a reinsurance policy underwritten by an insurance corporation. Another common procedure is to exclude covariant risks such as deaths associated with epidemics and natural disasters. Another is to place a ceiling on insurance payments (Roth et al., 2005). However, this approach puts the poor at a major disadvantage and renders them vulnerable to unforeseeable events such as droughts, floods and other disasters that occur frequently in South Asian countries. Events of this kind can have a major impact upon harvests, and the livelihoods of rural people. For this reason, more innovative insurance programmes that provide protection against these risks are urgently needed.

Conclusion: policy implications In light of the gross inadequacies of both governmental social protection schemes and commercial insurance, grassroots organizations such as cooperatives, microfinance organizations and nongovernmental organizations have developed a number of new initiatives which provide insurance to India’s low-income population. Although these insurance schemes were usually developed for their own members and not for the population at large, they have attracted non-members and resulted in an increase in the membership of these organizations. In many cases, the members of these organizations come from the same locality and this means that these organizations are often close-knit. The recent entry of commercial firms to the insurance field has posed new challenges. On the one hand, they have sought to exploit new market opportunities

62 Mariko Okamoto at ‘the bottom of the pyramid’. On the other hand, nongovernmental organizations have created a niche for themselves as agents to commercial providers, introducing potential clients to insurers and extending insurance benefits to many more people. Although the Indian government enacted regulations that encourage this development, it cannot abrogate its own responsibility to provide social protection to its citizens. It would be unconscionable to encourage the growth of private insurance without providing people who cannot afford to purchase commercial insurance with access to adequate social protection. It is in this regard that microinsurance offers poor households a realistic alternative to commercial insurance. Microinsurance is also a stepping stone towards extending statutory social security to all. There is no reason why the government, nongovernmental organizations and insurance firms cannot work together to provide social security to many more people. However, this will require active government support. The government should promote and support grassroots organizations to develop appropriate microinsurance products that comprehensively and effectively manage the risks which poor people face. It should launch a variety of programmes that will help nongovernmental organizations and self-organized communities meet this goal. The recent experience of microinsurance innovation in India suggests that a new paradigm for the provision of social security exists outside of the formal statutory and commercial sectors. This will require that financial and human resources are directed at the neediest and most neglected segments of the population. India’s experience in providing low-cost health insurance to poor people is also salutary. Studies have shown that voluntary associations comprising members who have similar interests and clearly defined agreements on contributions and benefits are effective and sustainable (Atim, 1998; Acharya and Ranson, 2005). India’s experience in providing health insurance through grassroots organizations provides insights into how health insurance programmes could be extended in other parts of the developing world. However, there are two issues that must be addressed. First, in the future, demand for health insurance among low-income people will undoubtedly increase. To respond to this demand, it is essential that the quality of current medical services be upgraded. It is obviously not sufficient to provide insurance coverage if the services are not of a sufficient quality to meet the need. The mobilization of resources by health insurance schemes must be accompanied by adequate investments in medical facilities and services so that they will improve and respond effectively to the needs of those who require medical care. Second, despite the groundbreaking efforts of cooperatives, microfinance organizations and other nongovernmental agencies, the majority of poor people in India are still beyond the reach of microinsurance schemes. Although examples have been given of how nongovernmental organizations have launched effective microinsurance schemes, they protect only a fraction of those in need of social protection. The Indira Kranti Patham (IKP) project in Andhra Pradesh has expanded rapidly and covered many more people than before but, while its scope has been enlarged, much more needs to be done if it is to provide social protection to the majority of the state’s population. The scheme is undoubtedly based on a

India’s social protection system for the poor 63 sound model and it has effectively harnessed the strength of women’s self-help groups as well as the district federations, but it still needs to expand its membership and provide comprehensive social protection. To achieve this goal, it is important that the barriers which impede progress be understood and addressed. In this way, a viable process of transformation that provides social protection to India’s poor can be initiated.

References Acharya, A. and Ranson, M.K.(2005). ‘Health Care Financing for the Poor: CommunityBased Health Insurance Schemes in Gujarat.’ Economic and Political Weekly, 17 September, pp. 4141–4150. Ahuja, R. and Narang, A. (2005). ‘Emerging Trends in Health Insurance for Low-Income Groups.’ Economic and Political Weekly, 17 September, pp. 4151–4157. Atim, C. (1998). Contribution of Mutual Health Organizations to Financing, Delivery, and Access to Health Care. Maryland: Abt Associates Inc. Dreze, J., Lanjouw, P. and Sharma, N.(1998). ‘Economic Development in Palanpur, 1957–93’, in Lanjouw, P. and Stern, N. (eds), Economic Development in Palanpur over Five Decades. Oxford: Clarendon Press, pp.114–238. IRDA (2002). ‘IRDA Notification October 16: Obligations of Insurers to Rural and Social Sectors.’ The Gazette of India Extraordinary Part III, Section 4, New Delhi. Available at http://www.irdaindia.org/. Kalavakonda,V.(2006). “Access to Insurance for the Poor: The Case of Indira Kranti Patham in Andhra Pradesh, India.” Access Finance, No.13, World Bank Group. Microinsurance Awards Secretariat (2007). ‘Microinsurance Awards Nominee 2007.’ Available at http://news.planetfinance.org/documents/FR/Nominees_MIA_270725_ ppt.pdf. Morduch, J. (1999). ‘Between the State and Market: Can Informal Insurance Patch the Safety Net?’ The World Bank Research Observer.14(2), pp. 187–207. Prahalad, C.K.(2005). The Fortune at the Bottom of the Pyramid. New Jersey: Warton School Publishing. Radermacher, R. et al. (2005). ‘Yeshasvini Trust, Karnataka India.’ CGAP Working Group on Microinsurance Good and Bad Practices Case Study, No.20. Roth, J. and Athreye, V. (2005). ‘TATA-AIG Life Insurance Company Ltd. India.’ CGAP Working Group on Microinsurance Good and Bad Practices Case Study, No.14. Roth, J., Churchill, C., Gabriele, R. and Gabriele, N. (2005). ‘Microinsurance and Microfinance Institutions: Evidence from India.’ CGAP Working Group on Microinsurance Good and Bad Practices Case Study, No.15. Shah, M.and Shinha, T. (2006). ‘SEWA’s Health Insurance Programme.’ Available at http://www.psi-conflisboa.com/portal/images/download/panel%202%20-%20shah.pdf. Vimo SEWA (2007). ‘Insurance Products’. Available at http://www.sewainsurance.org/ vimosewa5.htm, 2007/08/08.

4

Formalizing grassroots social security The experience of CARD in the Philippines Jaime Aristotle B. Alip and Takayoshi Amenomori

The Philippines is one of the few countries in the world where microinsurance is recognized and regulated by the government. Microinsurance has become an emerging industry in the country as mutual benefit associations affiliated with microfinance organizations have proliferated. The pioneer of this development is the Center for Agriculture and Rural Development (CARD) which was founded in 1986. In 1994 it introduced an innovative microfinance programme to provide burial and other forms of insurance to its members. This mutual fund later grew into the CARD Mutual Benefit Association (CARD MBA). This association is the life insurance arm of a network of several institutions operated by CARD including CARD itself, a rural bank, a training organization known as the Development Institute and a property insurance provider among others. This chapter traces CARD’s trail-blazing journey from a small nongovernmental organization providing microfinance services to a large and complex organization with a total membership of almost 700,000 people. Its experience in venturing through largely uncharted territory to successfully insuring poor people has contributed significantly to the emergence of the microinsurance industry in the Philippines. Most of its members are women from poor and low-income families who have long been neglected by commercial insurance companies as well as the government’s formal social security system. Lessons learned over the course of its history can be helpful in formalizing other microinsurance programmes not only in the Philippines but in other parts of the world. After all, large numbers of poor people are in need of protection against risk, indicating that there is room for growth in microinsurance around the world.

Microinsurance: the Phillipines context The Philippines is a tropical archipelago located in Southeast Asia with 7,107 islands and a total land area of approximately 300,000 sq. km. (116,000 sq. miles). It is the second largest archipelago in the world, next to Indonesia, and is divided into three major island groups: Luzon, Visayas and Mindanao. The country comprises seventeen administrative regions and a total of eighty provinces, 120 cities,

CARD in the Philippines 65 1,511 municipalities and 42,008 barangays (villages). The country’s capital city, Manila, is the seat of the national government. The Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD, 2009) places the Philippines among the lower middle-income countries. However, recent economic performance in the Philippines has been quite impressive, as indicated by a GDP growth rate which exceeded 5 per cent for four successive years before the country was affected by the global economic crises of 2008. Economic growth was accompanied by an annual population growth rate of more than 2 per cent, resulting in a lower rate of per capita GDP growth. The high population growth rate also relates to high under- and unemployment rates. In January 2009, the underemployment rate was 18.2 while the formal unemployment rate was 7.7 per cent (National Statistical Coordination Board, 2008a). Against this background, a large number of people continue to seek employment abroad. Indeed, the deployment of overseas Filipino workers has grown steadily, exceeding one million in 2007. As of December 2007, the total number of Filipinos residing abroad was estimated at 8.7 million (Philippine Overseas Employment Administration, 2007) which is equivalent to approximately 10 per cent of the total population. Remittances from overseas Filipinos are a significant source of foreign currency for the nation as a whole: as much as US$14.5 billion was sent back to the country by Filipinos working abroad in 2007 alone (Bangko Sentral ng Pilipinas, 2009). Poverty remains a serious problem. It is estimated that 4.7 million families, or 32.9 per cent of the country’s population, were living below the country’s official poverty line in 2006 (National Statistical Coordination Board, 2008b). This means that approximately one out of every three people was poor. Moreover, this represents an increase from the 2003 level of about 30 per cent. Using the one dollar a day poverty line, the United Nations (2009) reports that the proportion of the population living in poverty decreased from 30.7 per cent in 1991 to 22.5 per cent in 2000. However, by 2006, the proportion below this poverty line had not decreased further, showing that the poverty problem remains serious. Social protection in the Philippines Social protection in the Philippines is largely provided by three government organizations: the Social Security System (SSS), which serves private sector employees; the Government Service Insurance System which provides protection for public sector employees; and the Philippine Health Insurance Corporation (Philhealth), which provides health care financing to employees and self-employed individuals as well as a modicum of protection to workers in the informal economy. The cost of social security under these schemes is paid for by earnings-related contributions by employers and employees and, in the case of the self-employed, by voluntary contributions. The Social Security System offers the following services to its members: sickness, maternity, disability, retirement, death and funeral benefits, employment

66 Jaime A.B. Alip and Takayoshi Amenomori compensation, salary loans, emergency loans, educational loans and housing loans. The Philippine government reports that as of September 2007, this programme covered 27.8 million members. Of this number, about 801,000 or 3 per cent are employers, about 19 million or 70 per cent are employees, about 5 million or 18 per cent are self-employed and about 2.6 million or 9 per cent are members who make voluntary contributions to the system (Social Security System, 2009). The Government Service Insurance System is a pension fund providing compulsory life insurance, optional life insurance, retirement benefits, disability benefits for work-related contingencies and death benefits to civil servants and other government workers. The system currently has 1.4 million members and covers all government workers with the exception of members of the judiciary and constitutional commissions, the armed forces, the police and contractual employees who have no employee–employer relationship with the government (Government Service Insurance System, 2009). Philhealth covers employees from both the private and government sectors. It aims to provide universal health care coverage, but currently covers only eight out of every ten Filipinos. As of December 2008, Philhealth reported that it had about 16.4 million members with about 68 million beneficiaries. This is about 76 per cent of the country’s estimated population of 90 million. About three-quarters of Philhealth’s members are private and government sector workers in regular wage employment (Philippine Health Insurance Corporation, 2009). While there has been marked improvement of coverage in recent years, it is important to note that the government’s social insurance programmes primarily serve formal sector employees. To date, only 27 per cent of the Social Security System’s members are self-employed and voluntary members, while only a quarter of Philhealth’s members belong to the informal sector. Since the informal sector represents approximately half to three-quarters of the Philippine labour force this is unfortunate. Because informal workers operate outside the formal economy, they have limited access to public social security services. A coverage gap also occurs due to statutory exclusions, as in the case of the Government Service Insurance System which does not cover contract employees. In the case of the Social Security System, day labourers, domestic workers and self-employed people earning less than PhP1,000 (US$20.83) a month, employees and self-employed persons over 60 years old, and employees hired by a labour contractor on a short-term basis of six months or less are not covered. Even with the recent introduction of regulations that will expand the system to include household helpers, farmers, fisherfolk, overseas workers and the self-employed, many small entrepreneurs and informal workers are discouraged from registering due to the extensive documentation and highly complicated procedures required for processing applications. In the case of Philhealth, the programme fails to cover beneficiaries who are neither poor enough to qualify as indigents nor sufficiently well-off to pay regular premium contributions. Other issues also impede the effectiveness of the formal social security system. Gonzales (2007) found that the Social Security System and the Government Service Insurance System have a regressive contribution structure, and that their coverage

CARD in the Philippines 67 is not commensurate with the country’s level of development. Navarro (2004) reports that both programmes are negatively affected by actuarial mismatches between contributions and benefits. He believes that mandatory contributions to these programmes (8.4 per cent and 17.9 per cent of average monthly wages) are not consistent with the levels of benefits paid by the system. Without a significant increase in contribution rates, he predicts that benefits cannot be sustained in the long term. Both Gonzales (2007) and Navarro (2004) also report that non-enrolment and evasion are commonplace, reducing the revenues the social security system should receive. In addition, the value of benefits is low compared to the cost of premiums, and complaints by workers unable to obtain benefits when needed (due to non-remittance or underpayment by employers) are common. The actuarial health of both the Social Security System and the Government Service Insurance System has also been marred by poor management, internal inefficiencies, corruption and politicization. With regard to Philhealth, issues relative to the quality of health care providers, price control and fraudulent claims need to be addressed. Inequity is also a concern, since the Social Security System including Philhealth favours the better-off, even though they are subsidized by the poor. Gonzales (2007) finds that among those covered, higher paid workers benefit disproportionately from the Social Security System. Those with higher incomes have greater access to social insurance because they live in urban areas where most services are accessible, and they know how to use the system. Due to current financing practices, poorer groups, women and older workers are often the sources rather than the recipients of subsidies to the Social Security System. Microinsurance in the Philippines Given the country’s very large informal sector, there is a need for responsive social protection services that can cater for small and medium-sized micro entrepreneurs and wage earners. Considering the location and nature of their work, informal workers are economically poorer, face the most serious risks and are less able to secure social protection for themselves and their families. Therefore, the informal sector represents a sizeable client base for microinsurance and new opportunities to extend social protection to the poor. There are three types of microinsurance providers in the Philippines: the public scheme, which is limited to health care insurance under Philhealth; commercial insurers and member-based mutual insurers. There is currently little interest among commercial insurance companies to serve the low-income segment of the population, although a few have partnered with nongovernmental organizations, microfinance institutions or cooperatives to provide products suited to the needs of the members of these organizations. On the other hand, member-based microinsurance providers include traditional cooperatives and relatively new microfinance-based mutual benefit associations, established as subsidiaries to provide and extend risk protection services to low-income clients. Insurance services in the Philippines are regulated under the Insurance Code of 1978 (Presidential Decree No. 1460) and supervised by the government’s Insurance

68 Jaime A.B. Alip and Takayoshi Amenomori Commission. There are four types of insurance providers: life insurers, non-life insurers, composite insurers and mutual benefit associations. Distinctions are based on the amount of capitalization required by law. New insurance companies are required to have capitalization of not less than PhP1 billion (US$20.83 million), while composite insurers that offer both life and non-life insurance have capitalization requirements of not less than PhP2 billion (US$41.67 million). Existing insurance companies, which had lower capital requirements prior to May 2006, have until 2011 to comply with the new regulations. According to the Insurance Commission (2004), only twenty-five registered mutual benefit associations were in operation in 2004. They had aggregate assets worth PhP14.18 billion (US$295.4 million), but only two associations accounted for PhP7.15 billion (US$148.9 million) or almost half of these assets. These are the Armed Forces of the Philippines Mutual Benefit Association with PhP4.60 billion (US$95.83 million) in assets and the Philippine Public Schools Teachers Association Mutual Benefit Association with PhP2.55 billion (US$53.12 million) assets. Until recently, mutual benefit associations were largely professional organizations serving formal sector employees. Mutual aid associations such as CARD MBA which provide microinsurance products to the poor are a relatively recent innovation. There is no required minimum capitalization for mutual benefit associations, since they are non-stock, non-profit organizations. However, they are required to deposit a Guaranty Fund with the Insurance Commission. The law also provides for cooperatives to register with the Cooperative Development Authority, but they have not been adequately supervised by the insurance regulatory authorities. The International Labour Organization (2005) identified eighteen cooperative insurers in the Philippines that are registered with and supervised by the government’s Cooperative Development Authority. Among the largest of these are the Cooperative Insurance System of the Philippines with about 64,000 members, the First Community Cooperative with about 50,000 members and the Medical Mission Group Hospitals and Health Services Cooperative with about 38,000 members. The remaining cooperative insurers each serve approximately 50,000 people and the products they offer include life, hospitalization, loan protection and maternity care insurance. Membership contributions are usually quite small, varying from as little as US$2 per year to US$25 per year. As noted earlier, the advent of mutual benefit associations serving the poor is a relatively recent innovation. Most of these associations, like CARD MBA, emerged from existing microfinance organizations. In recent times, their growth has been spurred by the RIMANSI Organization for Asia and the Pacific Inc. RIMANSI is a resource centre which was founded in 2005 following an important meeting of microinsurance and microfinance organizations in 2004 when the need for a resource centre that could document and promote microinsurance activities was recognized. RIMANSI promotes the growth of mutual microinsurance institutions in the Philippines and Southeast Asia. As will be discussed later in this chapter, CARD MBA has worked closely with RIMANSI and other microinsurance organizations to promote the expansion of microinsurance to serve poor families.

CARD in the Philippines 69 CARD MBA and RIMANSI have ushered in a new type of mutual aid microinsurance programme that is exclusively engaged in the provision of affordable microinsurance products to poor and low-income households in the Philippines and elsewhere in South East Asia.

CARD: a pioneer of grassroots microinsurance CARD, which was founded in 1986, began its operations in April 1988 by providing livelihood assistance to landless female coconut workers in the southern Luzon region of the Philippines. Today, it has evolved into a network of social development organizations that provide complementary financial and non-financial services to socially and economically disadvantaged people. CARD’s clients are mostly poor women in rural areas who work in the informal economy. Its founders were a group of rural development practitioners who wished to assist landless rural workers. In the following year, it pilot-tested a group lending microfinance scheme based on the Grameen Bank’s approach. After years of microfinance operations, CARD recognized that the poor are a heterogeneous group needing a variety of services and that their needs evolve over time. In 2002, CARD made two crucial decisions: first, to shift from the Grameen Bank’s lending approach, and second, to expand its activities to cover not just Luzon, but also the Visayas and Mindanao regions. Sarmiento (2006) reports that the shift from group to individual lending has not only helped limit CARD’s drop-out rate but has attracted new members and encouraged client retention, as well as the return of old clients. In 1995, CARD’s Board of Directors began the process of transforming the organization into a bank. Since its founding, the leaders had wished to create a bank owned and managed by landless rural women. On 1 September 1997, it obtained a licence to operate as a rural bank in San Pablo City from the government’s Bangko Sentral ng Pilipinas (BSP), with an initial paid-up capital of PhP5 million (US$104,166). Using a phased approach, four out of thirteen CARD branches were converted into banks while the remaining branches continued to operate as nongovernmental microfinance organizations. The transformation of CARD from a nongovernmental organization into a bank allowed it to mobilize deposits from the public and tap into the commercial loan market. It was a major event in the history of the organization and the local microfinance industry. It was at about this time that CARD launched its microinsurance operations to respond to the needs of its members. These microinsurance activities will be discussed in more detail below. CARD’s assets crossed the PhP3 billion (US$62.5 million) mark in 2007. Its operations currently cover the entire Philippine archipelago, with branches spread as far as Sulu and Tawi Tawi in the South and Ilocos Norte in the North. Its clientmembership reached 687,934 in December 2008. It is estimated that approximately 3.4 million poor Filipinos benefit from its microinsurance services. CARD was awarded the Ramon Magsaysay Award for Public Service in 2008, in recognition of its leadership role in the Philippine microfinance industry. It is also emerging as a global leader in the field of microfinance and microinsurance, and has forged

70 Jaime A.B. Alip and Takayoshi Amenomori strategic partnerships with social development institutions in Cambodia, Vietnam, Indonesia, Laos and Hong Kong. The emergence of CARD MBA Like many nongovernmental organizations which serve the poor, CARD recognized that its members not only need loans but a variety of financial services, including insurance. While the poor face a variety of risks, such as accidental death and injury, illness, property loss and natural calamities, they are also the least able to obtain adequate risk protection to mitigate their losses. More often than not, they are unable to cope with risk, leading to financial setbacks that make them even poorer. For this reason, CARD augmented its earlier microfinance services with the introduction of microinsurance. In 1994, after a survey revealed substantial client demand for protection in the case of an unexpected death in the family, CARD introduced its first insurance product and the Members’ Mutual Fund was born. The Fund provided loan protection and burial insurance worth PhP2,500–5,000 (US$41.67–104.17) in exchange for weekly premium contributions of PhP2 (4 cents). This programme was very popular with members who expressed a high degree of satisfaction at its cost and coverage and, after two years, the original loan protection and funeral insurance programme was expanded to include a pension fund for elderly members who are unable to work. The pension paid between PhP300–600 (US$6.25–12.50) per month and this required the weekly contribution to be increased to PhP5 (10 cents). However, the pension scheme was implemented without an actuarial review or assessment of its viability and in 1998 an audit revealed that the new scheme was unsustainable and would require significant subsidies if it were to continue to pay benefits at the current level. Although most members were young with an average age of 43 years, future demand would exceed contributions and deplete the organization’s capital reserves. McCord and Buczkowski (2004) reported that members would have to contribute for two years in order to cover one month of pension benefits. To deal with this problem, CARD completely reorganized the scheme, and in 1999 created a new organization to manage the programme. This was CARD Mutual Benefit Association or CARD MBA. The organization registered with the Insurance Commission in 2000 and received its licence to operate as a mutual benefit association in May 2001, making it the first grassroots, memberowned and managed microinsurance organization to be formally recognized in the country. Through formalization, it also tapped actuarial support and the advice of insurance professionals who helped develop products and services suited to the needs of its members. They also provided important assistance with management. By establishing a separate mutual benefit association, which is a non-profit legal entity owned and managed by members, CARD would not be subject to the pension fund liabilities that were accruing under the old scheme. In addition, the old scheme had accumulated significant capital reserves that belonged to members. The decision to spin-off the old scheme into a new, separate mutual benefit association was also

CARD in the Philippines 71 consistent with the belief that poor people are not only empowered through gaining access to financial services but through asset ownership and actually controlling the resources accrued through their own contributions. According to McCord and Buczkowski (2004), the creation of a mutual benefit association reveals the organization’s ability to work closely with its members and understand their needs. When CARD MBA was established, no regulations governing the operation of microinsurance organizations were in existence. The term ‘microinsurance’ was not even being used, nor was it recognized by the country’s insurance industry. However, at that time, the demand for insurance from people with low incomes was being met by the emergence of a number of community-based microfinance organizations that were running in-house mutual benefit funds. These were mostly informal and unregulated, and were managed without the benefit of actuarial analyses or financial studies. A CARD survey of seventeen in-house providers (twelve cooperatives, three nongovernmental or microfinance organizations and two transport associations) in 2003 found that most of these informal microinsurance schemes had fewer than 3,000 members, and that 60 per cent had assets worth less than PhP300,000 (US$6,250) (Alip, Dimaculangan and David-Casis, 2009). However, as noted earlier, a few associations belonging to professional organizations such as the Philippine Public School Teachers Association and the armed forces were in existence, but these associations did not serve the poor. Not surprisingly, when CARD established its own mutual benefit association it had difficulty in registering. Because it varied significantly from the standard mutual benefit associations recognized by the regulatory authorities, and served poor people, the process took several years to complete. In fact, CARD MBA was only licensed in 2001, after a long process of negotiation and educating the authorities about its activities. CARD insurance services CARD MBA currently offers a range of insurance products and services to its members. Foremost among these is life insurance, which the association has crafted into a whole life plan with total and permanent disability cover plus an accidental death benefit rider. Members and their legal dependants are covered for a weekly contribution of PhP15 (31 cents). The total insured sum depends on the length of membership. Thus, in the event of the policy holder’s death, the beneficiary receives a payment calculated according to a predetermined table of insurance benefits reflecting the length of membership. Benefits typically range from a minimum of PhP2,000 (US$41.67) to a maximum of PhP100,000 (US$2,083). Benefits allocated for the death of a member’s dependant range from PhP5,000–10,000 (US$104.17– 208.33). Total and permanent disability benefits, on the other hand, range from PhP5,000–100,000 (US$104.17–2,083). The All-Loans Insurance Package is a modified loan redemption fund, which gives 100 per cent protection to members and lending institutions accredited by CARD. In the event of a member’s death, CARD MBA pays the outstanding loan balance to the institution and refunds to beneficiaries the amount paid by the

72 Jaime A.B. Alip and Takayoshi Amenomori deceased. Contributions are calculated based on the amount and term of the loan, and generally range from 0.38 per cent to 1.5 per cent of the principal amount of the loan. This is in addition to the benefits that the member or the member’s beneficiary receives from CARD MBA’s life insurance programme. CARD MBA also administers a Retirement Savings Fund, which pays members a lump sum at the age of 65. Members pay a weekly contribution of PhP5 (10 cents) until they reach this age. The amount of the lump sum retirement benefit depends on the age at which a member begins contributing. A member who joins the scheme at the age of 18 receives a lump sum benefit of PhP125,075 (US$2,605). On the other hand, a member who joins at the age of 64 receives a benefit of only PhP250.66 (US$5.22). Two other insurance schemes are the Motor Vehicle Accidental Hospitalization Benefit and the Automatic Loan Offsetting after Disability (Auto LOAD) Benefit. The former is linked to CARD MBA’s life insurance programme and covers expenses incurred if a member or a spouse is hospitalized as the result of a traffic accident. The latter scheme is a component of CARD’s All-Loan’s Insurance Package, and was introduced in 2006 to assist members who experience total and permanent disability with loan protection insurance. CARD MBA pays the balance of the loan to the lending institution and, in addition, the disabled member receives a monthly benefit for a period of eighteen months, aside from benefits received through the life insurance programme should the member subsequently die as a result of the accident. CARD MBA also assists its members obtain health insurance through the government’s Philhealth programme which was discussed earlier in this chapter. In addition, it offers a health insurance plan called ‘Ang Kalusugan mo, Pangangalagaan ng CARD’ (AKAP-CARD) as an incentive to members who have been with the organization for at least one year. In exchange for a PhP1,800 (US$37.50) premium, a member is entitled to health services amounting to PhP30,000 (US$625) per year from PhilamCare-accredited clinics and hospitals. Property insurance is provided to members through another CARD affiliated organization which partners with commercial insurance companies to offer a bundle of insurance products at higher rates than those charged for CARD MBA’s usual services. These include personal accident, funeral and disability insurance as well as insurance for house repairs if a member’s dwelling is damaged by fire or other insured events. Mortgages are also provided. In addition to its insurance products, CARD MBA provides social services such as the Out-of-School Youth Programme, which offers scholarships to qualified children of members, and the free wedding service, which enables anyone who has been with the association for at least ten months to marry their common-law partners in a mass wedding. The latter service allows members to legalize their unions, thus making their spouses legal dependents and, hence, beneficiaries of the CARD MBA insurance programme. There is also a Refund of Contribution service which entitles members who have established three years of continuous membership to a 50 per cent refund of all contributions made to the life insurance programme if they resign before the age of 65. The association also operates its own credit bureau which is a general membership database containing members’

CARD in the Philippines 73 profiles and credit histories. This database operates through a special microinsurance underwriting and claims evaluation tool developed by CARD MBA. CARD MBA also has a formal and transparent claims settlement policy whereby it facilitates member involvement in claims settlement through a Board of Awards that hears and decides appeals. Coordinators, who are selected from among CARD’s members, are actively involved in assisting members to make and settle claims. They advise and represent members, and although they serve on a voluntary basis, normally for two years at a time, they receive a small honorarium for their services. CARD MBA is sensitive to the fact that its members belong to low-income groups and must be promptly assisted in times of need. To facilitate payouts, it has institutionalized a ‘one–three–five-day procedure’ which ensures that benefits are paid within twenty-four hours upon notification of death (before interment) or within three to five days after notification (after interment). Advocacy, education and collaboration CARD MBA has invested a great deal of effort into making microinsurance more widely understood. It has been active on the policy front, advocating and promoting partnerships with government agencies and other organizations providing microfinance services. As a result of these efforts, microinsurance has been recognized as a legitimate poverty-alleviation strategy by the government. It has also resulted in the spread of microinsurance and contributed to the recognition of microinsurance by the insurance industry and the government’s insurance regulators. A significant step towards enhancing collaboration with other microfinance and microinsurance providers was taken by CARD MBA in 2004 when it sponsored the first Microinsurance Forum in the Philippines. This event was supported by the Canadian Cooperative Association and brought together a number of microfinance organizations and microinsurance providers as well as other interested parties from the nongovernmental sector. It was at this forum that the idea of strengthening collaboration between microinsurance providers was extensively discussed. This led to the creation of the RIMANSI resource centre which was mentioned earlier. Using CARD MBA’s business model, RIMANSI has supported the spread of microinsurance in the Philippines and elsewhere in the region. By December 2008, it had facilitated the registration of seven microinsurance organizations with a total of more than 964,700 members. CARD MBA has also been active in supporting other microinsurance providers in the Philippines. In 2006, it launched a programme known as Build, Operate and Transfer (BOAT) to assist mutual benefit associations to expand their services, and to serve their members in a cost-effective and sustainable manner. As of March 2009, seven associations are partners in this programme and they have a combined membership of about 53,000. Through these members, they insure approximately 248,400 individuals. As noted earlier, CARD MBA also provides training for its staff and members and, in 2005, its original training programme was strengthened and renamed the Development Institute. The Institute also provides training for the workers of other microfinance organizations in the country.

74 Jaime A.B. Alip and Takayoshi Amenomori Together with RIMANSI and other microfinance organizations, CARD MBA was able to persuade the government to give proper recognition to microinsurance. In 2006, the Insurance Commission issued a landmark regulation, Insurance Memorandum Circular No. 9–2006, entitled Microinsurance Regulation and Declaration of Policy Objectives. This document defines microinsurance as ‘an insurance business activity of providing specific insurance products that meet the needs of the disadvantaged for risk protection and relief against distress or misfortune.’ It also identifies the groups to be targeted by microinsurance providers, and specifies the maximum premium that may be charged. This amount is 10 per cent of the current daily minimum wage rate for non-agricultural workers in Manila (which is equivalent to about US$25 per month). The document also specifies the maximum benefit that can be paid for life insurance. This amount is approximately PhP165,000 (about US$3,437). It also stipulates that insurance policies must be easy to understand and have simple documentation requirements. The collection of premiums must be tailored to the needs of the low-income market. It was noted earlier that mutual benefit associations are not required to have capitalized funds. However, they are required to have a Guaranty Fund amounting to PhP125 million (US$2.6 million). To facilitate the expansion of microinsurance, this circular reduces the Guaranty Fund for organizations engaging exclusively in microinsurance with at least 5,000 members to PhP5 million (US$104,000). However, in order to build up their capitalization over time, microinsurance MBAs are required to increase their Guaranty Fund by an amount equivalent to 5 per cent of their gross premium collections until it reaches PhP125 million (US$2.60 million) or 12.5 per cent of the required capital for domestic life insurance companies. This has paved the way for many more microfinance institutions to create microinsurance programmes or formalize their existing microinsurance schemes. Another indication of the recognition of microinsurance was the issuing of Presidential Proclamation No. 1212 in 2007 which declared the month of January as ‘National Microinsurance Month’. This proclamation will undoubtedly foster a greater awareness and understanding of microinsurance and of its social and economic benefits, and further strengthen the work of the microinsurance sector in the Philippines.

Challenges and lessons There is high demand for insurance among poor families in the Philippines. In 2002, a market research conducted by CARD MBA with 527 families in Luzon and Bicol showed that poor families are not only interested in having access to insurance, but they are willing to pay for these services provided that they are affordable and suited to their needs. Microinsurance is also a valuable poverty-alleviation tool that helps mitigate risk and enables poor people to cope with various crises and adversities. Microinsurance is also a valuable resource for entrepreneurs and those managing microenterprises. It is a safety net and cushions the impact of adverse events, allowing small business owners to continue their economic activities. It was in recognition of the need for appropriate and affordable insurance services among

CARD in the Philippines 75 poor people in the Philippines that CARD MBA has committed itself to responding to the multifaceted needs of its members. However, microinsurance obviously makes good business sense particularly for nongovernmental organizations engaged in microfinance. By providing microinsurance products, the microfinance institution’s loan portfolio is protected, and its competitiveness also increases. Clients who are adequately insured against risk are also more likely to be loyal to the institution. On the other hand, providing appropriate insurance products requires skills and institutional capacities that go well beyond regular microfinance services such as extending credit and providing savings accounts. CARD’s venture into microinsurance has not been easy and, as was noted earlier, the financial stability of the institution was even threatened. However, with effective actuarial modelling, professional management and the support of its members, CARD was able to meet many challenges. Through the commitment of its members and managers, and an effective business model, it has been able to deal with many complex issues relating to premium collection, the management of covariant risks, moral hazard and adverse selection. It was able to benefit from the way its microfinance and microinsurance operations collaborated and established synergy. A number of factors have contributed directly to CARD MBA’s success. One of these is the organization’s large membership base. This base has grown rapidly as its services have become better known and respected. Although members in receipt of microfinance loans are required to have insurance, this is not the only factor contributing to its sizeable membership. Affordability and the way products have been customized to meet members’ needs have resonated with many lowincome households. In addition, the organization’s microinsurance products are simple and easy to understand, with the added bonus that contributions and benefit amounts are acceptable to members. Members also place a high value on CARD MBA’s responsiveness in times of need. As noted earlier, it seeks to settle claims quickly, and this compares favourably with commercial insurers who often require at least one month to settle claims. Another advantage is that CARD MBA has a professionally run and effectively managed operation. Although, as noted earlier, it collaborates with other CARD affiliates in a synergistic way, microfinance and microinsurance are administratively separated, ensuring higher efficiency. CARD MBA has also maintained low administrative costs, typically spending less than 20 per cent on administration. This is well below the amount that commercial insurance companies generally spend, which can be as high as 40 per cent. The costs of marketing and commissions in the private sector are particularly high. CARD MBA has kept expenses low by teaming up with its affiliates such as CARD Bank to market its products and collect premiums. These savings are used to charge lower premiums and to pay higher benefits. CARD MBA’s status as a member-owned association produces unique benefits of its own. For example, the sense of ownership among members helps to safeguard the association’s funds. Members elect representatives to the Board of Trustees from among their own ranks and also participate in day-to-day operations through

76 Jaime A.B. Alip and Takayoshi Amenomori the Coordinators whose work was discussed earlier. Such participation helps reduce adverse selection and moral hazard, resulting in fewer claims. Members are aware that the association’s profits remain with the members, so that they are motivated to prevent abuse and exploitation. However, although the members own the organization it is managed by professionals and this further prevents abuse. It also ensures the provision of actuarially sound products and services. Organizational growth has also been bolstered by the effective implementation of a public education campaign designed to inform people, including its members, about its programmes. The trust it has built with its members over the years has created social capital and goodwill which augers well for the future. Another factor contributing to CARD’s success is its adherence to government regulations. As noted earlier, it is registered and licensed by the Insurance Commission and its adherence to the Commission’s requirements has protected the organization as well as its members. Because it is well respected as an efficient and well-managed organization, it is able to work closely with the Commission and other government agencies. This has permitted it to engage in advocacy to ensure a favourable policy environment for microinsurance. Operating within this policy environment, it has been able to work effectively with other stakeholders to promote the growth of microinsurance and to extend social protection to the disadvantaged.

The way forward CARD recognizes that poor people’s needs evolve over time. While microfinance responds to their current financial requirements, microinsurance also contributes to their future financial security. As noted earlier, a significant proportion of the population have needs that are not being met by the commercial insurance industry or by the government’s social protection system. Microinsurance that is designed specifically for poor people therefore fills an important niche. It is for this reason that CARD is working closely with the government’s Insurance Commission, RIMANSI and other microinsurance providers to develop microinsurance in the Philippines. It believes that the way forward lies in continued advocacy, and in engaging many more grassroots microinsurance organizations to establish their own products or to strengthen and formalize existing schemes. CARD and its partners also believe that more effort needs to be put into research and development to determine which interventions are the most effective. Best practices also need to be documented to improve understanding of how microinsurance organizations can achieve their goals. These activities need to be accompanied by the expansion of systematic evaluation activities. Ongoing efforts to develop a database and management information system capable of assessing the performance and operations of microinsurance organizations need to be supported. Although, as has been shown already, many microinsurance organizations in the Philippines are collaborating closely, more needs to be done to standardize their operations and services. All stakeholders, including regulators, practitioners and the general public, need to be brought to the table to establish performance standards in line with international best practices in microinsurance. Through collaboration,

CARD in the Philippines 77 they can ensure that microinsurance programmes are efficiently managed and that they serve the needs of those who are most in need of protection against the risks that threaten their well-being. This goal is being met not only in the Philippines, but through international collaboration with microinsurers in other countries in the region as well.

Acknowledgements The authors would like to acknowledge Camilo Casals, Epifanio Maniebo, Gilbert Llanto and others who have previously worked with Dr Alip in documenting CARD’s journey as a pioneer of microfinance and microinsurance innovations in the Philippines. Research on this chapter was facilitated by the wealth of information found in the numerous publications of CARD MRI and RIMANSI. Thanks also to Ma Chona David-Casis, Alexander Dimaculangan, and Marilyn MagamponManila whose earlier works on CARD MBA and microinsurance provided inspiration and useful references in the writing of this chapter.

References Alip, J.A., Dimaculangan, A. and David-Casis, M.C. (2009). Aboard the BOAT of CARD MBA: Insights on Promoting Mutuality in the Philippines. Laguna, Philippines: Center for Agriculture and Rural Development, Inc. Bangko Sentral ng Pilipinas. (2009). ‘Selected Economic and Financial Indicators.’ Available at http://www.bsp.gov.ph/statistics/keystat/sefi.pdf> (accessed 27 July 2009). Development Assistance Committee of OECD (2009) ‘DAC List of ODA Recipients.’ Available at http://www.oecd.org/dataoecd/62/48/41655745.pdf (accessed 1 July 2009). Gonzales, E. (2007). ‘Political Will is the Key to Social Protection.’ Available at http://www. socialwatch.org/en/informesNacionales/548.html (accessed 31 July 2009). Government Service Insurance System. (2009). The GSIS. http://www.gsis.gov.ph (accessed 31 July 2009). IILO/STEP Programme. (2005). ‘Inventory of Micro-Insurance Schemes in the Philippines.’ Available at http:// www.ilo.org/public/english/protection/socsec/step/download/827p1. pdf (accessed 12 July 2009). Insurance Commission. (2004). Annual Report. Available at http://www.insurance.gov.ph (accessed 17 July 2009). McCord, M. and Buczkowski, G. (2004). CARD MBA: The Philippines. CARD MRI Occasional Paper No. 2. Laguna, Philippines: Center for Agriculture and Rural Development, Inc. National Statistical Coordination Board. (2008a). ‘Statistics-Labor and Employment – April.’ Available at http://www.nscb.gov.ph/secstat/d_labor.asp (accessed 1 July 2009). National Statistical Coordination Board. (2008b). ‘Philippine Poverty Statistics-Annual per Capita Poverty Thresholds, Poverty Incidence and Magnitude of Poor Population: 2000, 2003 and 2006.’ Available at http://www.nscb.gov.ph/poverty/2006_05mar08/ table_2.asp (accessed 1 July 2009). Navarro, M., Sr. (2004). ‘Funding Social Security Benefits.’ Paper presented at the Philippine Social Security Convention, 2–3 February. Available at http://www.philssa.org/paper_ martin.pdf (accessed 31 July 2009).

78 Jaime A.B. Alip and Takayoshi Amenomori Philippine Health Insurance Corporation. (2009). Stats and Charts. http://www.philhealth. gov.ph/about_us/others/snc2008.pdf (accessed 17 July 2009). Philippine Overseas Employment Administration. (2007). ‘2007 Overseas Employment Statistics.’ Available at http://www.poea.gov.ph/stats/stats2007.pdf (accessed 27 July 2009). Sarmiento, F. (2006). ‘Managing Client Expansion and Growth of Card Inc. while Maintaining Portfolio Quality, Profitability and Leadership Position in the Philippine Microfinance Industry.’ Unpublished thesis, Asian Institute of Management. Social Security System. (2009). Facts and Figures. http://www.sss.gov.ph/sss/index2.jsp? secid=805&cat=6&pg=null (accessed 17 July 2009). United Nations. (2009). ‘Millennium Development Goals Indicators.’ Available at http://unstats.un.org/unsd/mdg/Data.aspx (accessed 17 July 2009).

5

Investment-based grassroots social security The case of the Women’s Co-op in Sri Lanka Mitsuhiko Hosaka and Nandasiri Gamage

The Democratic Socialist Republic of Sri Lanka is a small island country on the Indian Ocean with a population of twenty million people spread over an area of 66,000 square kilometres. It has a diverse climate and topography, and different ethnic groups, languages, cultures and religions. In terms of ethnicity and religion, the predominantly Buddhist Sinhala people constitute about 74 per cent of the population, while minorities include the mostly Hindu Tamils with about 18 per cent of the population, and the Muslims with 7 per cent. The country’s indigenous inhabitants, the Veddahs, are very few in number and are estimated to be fewer than 1,000. Previously known as Ceylon, Sri Lanka won independence from British imperial rule in 1948 and became a self-governing member of the British Commonwealth. In 1972, the country became a republic. Even before independence, Sri Lanka’s people secured political participation within the British imperial system. In 1931, constitutional reform was enacted which established universal adult suffrage without distinction to sex or wealth. This development contributed to the growing political consciousness among the people and determination to be involved in political activities even at the grassroots level. Until recently, the government changed regularly, with power shifting alternately between the major political parties. Administratively, the country is divided into nine provinces which are further subdivided into twenty-five districts. Each province is governed by a directly elected provincial council except the Northern province, while each district is run by the civil service. An armed conflict between the Sinhala government and a secessionist Tamil Tiger group wracked the country for a quarter of a century, but in May 2009 government forces re-established control over the northern part of the island which had been in the hands of the Tamil guerrillas. In December 2004, a tsunami hit the island claiming more than 30,000 lives. Each of these tragedies made an enduring impact on the country, severely affecting the welfare and social cohesiveness of the population complicating its social development policies which used to show considerably high performance. Sri Lanka has for many years had proactive governments and its development process has been largely directed by the state. Indeed, Sri Lanka was described as an Asian ‘welfare state’ characterized by extensive government intervention

80 Mitsuhiko Hosaka and Nandasiri Gamage in both economic and social affairs. However in the late 1970s, a fundamental change took place when the government moved away from its centralized state-directed, import-substitution approach with a strong commitment to redistribution, to an open, liberalized and growth-oriented strategy that continues to this day. According to the UNDP (2007), Sri Lanka’s Human Development Index ranks medium by international standards but highest among its South Asian neighbours. Although GDP per capita is modest at US$4,595, life expectancy at birth is 71.6 years and the adult literacy rate is 90.7 per cent. In the early 1980s, Sen (1981) attributed Sri Lanka’s high social indicators to its social service programmes and egalitarian policies. Arguably, however, earlier government policies designed to strengthen welfare and redistributive justice through a restrictive trade regime failed to produce sufficient growth, resulting in what was often described as a situation where ‘poverty rather than wealth was shared’. Many rural youth, both Sinhala and Tamil, remained outside the economic mainstream. This problem contributed to the ethnic violence that erupted in the 1970s (Gunatilaka and Chotikapanich, 2006). After economic liberalization was introduced, income inequality increased, further aggravating the situation (Vidanapathirana, 2007). The UNDP (2007) reports that Sri Lanka’s Gini Index stands at more than 0.40 and that 25 per cent of the population live below the national poverty line. Although Sri Lanka maintains an extensive social services system, there are serious implementation problems resulting from weak local administrations and a highly politicized decision-making process. When needy people require assistance, they tend to approach politicians rather than social service agencies. Similarly, those seeking employment often do the same. The political process is also used to obtain public services such as water supplies and drainage. This has fostered a clientist, patronage system and a populist government. Castells (1983, p. 175) defines populism as ‘the process of establishing political legitimacy on the basis of a popular mobilization supported by and aimed at the delivery of land, housing, and public services’. While a populist culture may sometimes enhance people’s bargaining power, it eventually leads to excessive politicization, dependency on politicians and unequal access to services. There have been cases in Sri Lanka where politically motivated activities marred the attempts of selforganized communities to improve their livelihoods. On the other hand, poor communities have often mobilized to obtain the services they need without succumbing to political patronage and hierarchical control. In this chapter, the authors discuss the case of the Women’s Co-op to illustrate how people can mobilize at the grassroots level to enhance social protection and improve their well-being. The Women’s Co-op is an example of a mutual selfhelp group engaged in savings and credit that eventually expanded into an organization managing a mutually financed programme for income generation, housing and social security. The chapter shows how the Co-op enables its members to save, invest and manage their financial affairs. It also shows how members of the Co-op and their families obtain services at times of crisis and how the Co-op

The Women’s Co-op in Sri Lanka 81 functions today as an effective social protection agency. But first, an account of Sri Lanka’s statutory social security system will be provided.

Sri Lanka’s social security system As noted earlier, Sri Lanka is often described as a ‘welfare state’. The preindependence State Council of Ceylon, elected under universal adult suffrage, and the post-independence government, established after the Second World War, both laid the foundations for universal education, free medical services, food subsidies and rent control. These were put into effect through a series of legal and institutional instruments such as the Kannangara Report of 1943 which led to the Education Act of 1945, the Rent Restriction Ordinance of 1942 and the subsequent Rent Act of 1948, the Health Act of 1953 as well as the establishment of the Department of Social Services in 1948. Analysts view the strong push for social welfare programmes through the 1940s as a concessionary response to the political challenges posed by left-wing parties demanding radical social changes (Abeyratne, 2002; Athukorala and Jayasuriya, 1994). State-managed, universal social services were consolidated and expanded during the late 1950s and early 1960s under the country’s socialist government. In the late 1970s, the government’s political orientation shifted from egalitarianism to liberalism. Welfare expenditures as a percentage of total government expenditure fell from 40 per cent in the early 1970s to 11 per cent in 1981. Food subsidies were replaced by a food stamp scheme that was implemented in a more targeted and market-oriented manner. Private medical and education services were expanded. The poverty-alleviation programme, Janasaviya, which was introduced in 1989, emphasized self-help. Jayasuriya (2000) argues that the country’s universalistic social policies were gradually dismantled and, in their place, a selective, residual strategy shaped around entrepreneurial development and market-oriented social safety nets was adopted. Yet, under a populist political culture of this kind, a curtailment of government welfare expenditures is often accompanied either by alternative compensatory benefits to the poor, or by measures intended to ensure that the poorest people are not too adversely affected (Peiris, 1996). Programmes designed to enable people to improve their houses in low-income communities and to mobilize their own resources with state land and credit services were increasingly emphasized by the government. Another factor was the labour unions which exerted pressure on the government to maintain social spending. Consequently, Sri Lanka’s social protection system is quite extensive when compared to other South Asian countries. The country has a few statutory social security schemes. There are several provident funds which provide for the elderly, disabled and bereaved. For example, the Employees’ Provident Fund is a mandatory savings account for those in regular wage employment. It requires payroll deductions to be made from the salaries of male workers up to the age of 55 and female workers up to the age of 50. However, those engaged in family labour, civil servants, self-employed persons, farmers and fishermen are excluded. Employees are also covered by the employer liability scheme for work injury. In addition, the Civil Service Pension Scheme is available

82 Mitsuhiko Hosaka and Nandasiri Gamage to civil servants. A voluntary government scheme for informal sector workers has recently been established. Overall, it is estimated that about one-third of the workforce is covered by the statutory social security system, which leaves the majority in the informal sector without any protection (World Bank, 2006). In addition, about fifteen private insurance companies provide life insurance and retirement annuities, but they have a negligible impact upon the poor. There is no government-sponsored health insurance, but medical care is available free of charge in government health centres and hospitals. As noted earlier, Sri Lanka has a comparatively high life expectancy and other positive health-related indicators. There have been significant reductions in communicable diseases and the under-5 mortality rate has declined from 100 deaths per 1,000 live births in 1970 to fourteen deaths in 2005. However, its per capita health expenditures (US$163 in 2004) and the number of physicians per 100,000 people (fifty-five in 2000–2004) are relatively low among countries at a comparable level of economic and social development (UNDP, 2007). Poor people often claim that government hospitals are overcrowded, and that private facilities are not affordable. Strikes by health care workers are also common. Sri Lanka’s current poverty-alleviation programme, known as Samurdhi, replaced the previous government’s Janasaviya programme. Families identified as eligible may receive commodity stamps (‘food coupons’) that can be used at government cooperative stores. They also receive a cash benefit of which one part is deposited in a compulsory savings account. Accumulated savings may be used to provide small loans for Samurdhi recipients. The programme also offers training for rural entrepreneurship development and features a microinsurance component. Participants in this programme are required to contribute a small amount to an insurance fund which covers the recipient in the case of sickness, the birth or marriage of a child and a death in the family. However, an evaluation by the World Bank is not convinced of Samurdhi’s actuarial soundness and financial viability (World Bank, 2006). The programme has been extended to about 40 per cent of the total population, which is well above the estimated proportion of people below the poverty line. Researchers argue that due to a lack of transparency in selection procedures, and the influence of party politics, a considerable number of non-poor have benefited from the programme while many poor people have not been covered. As in many other countries, local communities in Sri Lanka have developed a number of mutual associations, such as burial societies and benefit associations. These societies are organized to help members cope with funeral expenses and other contingencies, but they are informally governed and managed and their actuarial soundness has not been properly established. Recently, some nongovernmental organizations have attempted to introduce microinsurance to low-income communities by acting as intermediaries between individuals, families and the commercial insurance firms. Some have also established their own microinsurance programmes. However, in contrast to the programmes introduced by external agents, the Women’s Co-op discussed below is a federation of community-based groups which has developed its own unique microinsurance scheme serving its

The Women’s Co-op in Sri Lanka 83 members at the grassroots level. Its activities should be of wider interest when exploring ways of formalizing management procedures based on a community initiative.

The origin and evolution of the Women’s Co-op During the mid-1980s, the Sri Lankan government launched the Million Houses Programme in an effort to support participatory housing and community upgrading. Managed under the direction of the National Housing Development Authority (NHDA), this programme comprised a package of ‘enabling policies’ designed to facilitate the ability of low-income people to house themselves. One element of the programme was selecting community leaders from informal settlements in Colombo, the country’s largest city, and assigning them to organize women in other poor communities. The team of selected leaders, most of whom were women, visited these areas, shared their experiences and linked new communities to the programme. Activities centred on forming mutual help groups to increase community access to commercial banks offering credit facilities. After about one year, the team decided that it wanted to work independently of the Housing Development Authority. The workers wanted to be independent and accountable to themselves, and did not think it made sense to report to a government entity on local community organizing activities. To facilitate their work, they established their own organization called Praja Sahayaka Sewaya (Community Support Services), also known as PSS. In 1989, PSS members revised their original community organizing strategies and established a network of women’s grassroots saving groups. In 1991, the organization registered with the government under the Cooperative Societies Law as the Colombo Women’s Thrift and Credit Cooperative Society with approximately 3,600 members. As their activities rapidly expanded and spread across the country, the Cooperative Society re-registered in 1998 as the Sri Lanka Women’s Development Services Cooperative Society, Ltd. For many years, the organization was known as the ‘Women’s Bank’ until 2009 when it became known as the ‘Women’s Co-op’. This new name reflected the organization’s focus on fostering cooperative solidarity rather than providing banking services. Many of the women who had been involved in PSS were elected to the National Executive Council, a central body of leaders elected from among the Women’s Coop members. National Executive Council members include homemakers, unpaid family labourers and family breadwinners from Sri Lankan informal settlements who were engaged in income-generating microenterprises using credit obtained from the Women’s Co-op. Council leaders provide extensive advice to other groups located throughout the country while also monitoring their banking operations. They receive nominal allowances, which are generated from their investment in Co-op activities. Indeed, management costs as a whole are covered by collective member investment within the Co-op. The Women’s Co-op is self-financed and minimally dependent upon external resources, with the exception that some grants were received for expansion and emergencies.

84 Mitsuhiko Hosaka and Nandasiri Gamage Just a few years after its establishment, leaders at the Women’s Co-op realized that 15 per cent of members used credit for housing purposes, despite the fact that interest was charged at a rate of 24 per cent per annum. At the time, the government had been providing housing loan packages through the National Housing Development Authority, which offered housing options at a subsidized interest rate of 10 per cent per annum or less. This suggested that there would be high demand for a community-owned housing credit system, even if credit was charged at a higher interest rate. Co-op leaders negotiated with a local housing cooperative in order to secure housing loans for three women’s groups. After becoming convinced of members’ ability to repay such loans, the Co-op introduced an experimental housing scheme in 1993 at an interest rate of 2 per cent per month. Meanwhile, during the Million Houses Programme, a large part of the Housing Development Authority’s budget was allocated to low-interest housing loans for low-income people. Years before, at the time of the 1988 election, the then ruling party was writing off housing loans to secure electoral support among the poor. As a result, not only did the lowest-income groups stop repaying but many others did as well, which led to an almost total collapse of the loan scheme. As a result, the recovery rate plummeted from 70 to 6 per cent. Subsequent governments repeated this practice at election time. Ultimately, poor borrowers suffered greatly as their access to credit was terminated and they had to live in unfinished houses for extended periods of time. It was then that many families turned to the Women’s Co-op housing loans. These loans cover shelter improvement, toilet construction, electricity instalment, water connection and sometimes even land purchase. The Women’s Co-op housing loans programme has continued to expand, irrespective of subsequent changes in Sri Lanka’s political environment. In 1993, a member proposed that the Women’s Co-op should establish an insurance scheme similar to that available to the urban middle class. She explained that her husband, an auto-rickshaw driver, had been in a serious traffic accident, and as a result of this experience she felt socially and financially insecure. If her husband were to die, she would not be able to maintain her creditworthiness with other members – and she had no one to guarantee her loans. Few members at the time would have believed that an insurance scheme of this kind was possible, but the National Executive Council promised to consider the possibility of introducing such a scheme. Incidentally, when a government minister was killed in a bomb attack in 1994, four Co-op members who happened to be in the vicinity were fatally injured along with their family members. Unfortunately, the funds collected by members were insufficient to pay for their funeral and to help their dependants. This unfortunate event further demonstrated the need for an insurance programme that could meet the needs of those exposed to unfortunate adversities of this kind. The organization’s leaders redoubled their efforts and early on in the new century, several new microinsurance projects were introduced. These will be discussed later.

The Women’s Co-op in Sri Lanka 85

Management structure and operating processes The Women’s Co-op’s governing body, the National Executive Council, is located in an informal settlement in the city of Colombo. However, operational decisions affecting membership, deposits and loans are made by the pradeshikaya or Co-op branches consisting of assemblies of local groups. Each pradeshikaya has an average of 250 members, and no less than 80 members. As members develop proficiency in operations and their microfinance services expand, new branches with around ten to thirty groups are established to keep their size within manageable limits. Each branch has its own board of directors, guaranteeing that the Women’s Co-op is democratically run and committed to a decentralized management process. The basic component of the Women’s Co-op is women’s mutual help groups. Women at the grassroots level learn about the Co-op by word of mouth. Once five to fifteen women from different households in the same neighbourhood have come together, they may form a mutual help group, begin activities as specified by the rules, and benefit from the advice of nearby groups and local branch leaders. Each group must hold weekly meetings, where individual members save 5 rupees per week. Application for credit is also made at these meetings. Credit is provided by a branch to a local group, and not to individuals. No collateral is required, but group members are collectively liable to repay the loan. Loan applications are discussed by the group, with priority given to its neediest members. The size of loans allocated to individual members is limited by the rules but also by each group’s discussions and decisions. Generally, loans may range from 250 to 300,000 rupees. The rate of interest, or ‘service charge’, for a normal loan is set at 2 per cent per month (or 4 per cent for members at the initial small loan stage). The repayment ratio is very high and currently stands at almost 100 per cent. When the Women’s Co-op was formed in 1991, it functioned under a centralized management structure. All groups were directly linked to a small team of experienced leaders, and accounting and operations were managed at this level. By 1993, however, members had come to realize that in order to be more effective, decentralization of management responsibilities was necessary. At the time, small women’s groups were expanding not only within Colombo but in the country’s more remote rural areas. Group leaders made the decision to federate several groups located in close proximity to each other so that they could form branches. Treasurers from these groups jointly constituted branch management committees, and the branches thus became accounting units within the Co-op. Funds invested by Coop members circulate through deposits, credits and loan recovery, and are principally reinvested in the local branch. However, this innovation in the management structure raised legal issues. Rearranging local credit cooperatives into a federation was far from conventional. While discussions regarding the formulation of a new constitution and organizational by-laws were taking place, the Co-op’s leaders were also negotiating with the provincial and national government’s cooperative departments. Sri Lanka has a long history of cooperative movements dating back to the 1910s. By 1998, about 5.3 million people were organized into 11,762 cooperative societies, including both

86 Mitsuhiko Hosaka and Nandasiri Gamage Multi-Purpose Cooperative Societies and Thrift and Credit Cooperative Societies. The Women’s Co-op was aware of the limitations of these conventional societies. When giving loans, many credit societies accord priority to members with greater accumulated deposits and ready secured collateral, a system which inevitably favours wealthier people. Furthermore, locally pooled savings were often exploited by commercial banks. Although the government was reluctant to allow the Women’s Co-op to deviate from its standard requirements, its leaders eventually received approval and acquired its legal status as a national-level credit cooperative society. As of August 2009, the Women’s Co-op had 34,613 members spread across eighteen districts in the country. In addition, approximately 40,000 people were in the process of being organized to establish formal member groups. Through its community-based finance programmes, the Co-op has contributed to the betterment of people’s livelihoods in both urban and rural areas. In 2009, accumulated assets amounted to over 1.1 billion rupees, and in 2008 the Women’s Co-op provided nearly 2 billion rupees in loans to its members. Loans were disbursed for the following purposes: housing (25 per cent), income-generation projects (10 per cent), debt clearance (11 per cent), recovery of pawned articles (8 per cent), health and welfare (8 per cent), consumption purposes (8 per cent) and covering the enrolment deposit for microinsurance (6 per cent). By this time, the Women’s Co-op had 117 branches or pradeshikaya and 104 quasi-branches which were in the process of being recognized as full-fledged branches. The reach of the Women’s Co-op extends as far as the disaster-hit and Tamil resettlement areas in the East and North but management performance differs among branches, which gives rise to some concern that disparities among areas may widen. As such, mechanisms allowing for groups from different areas to freely exchange ideas and experiences have been introduced. In this way, local members are exposed to outside knowledge and the opportunity to adapt innovations to their local needs. Indeed, many opportunities exist for Co-op members, and particularly group leaders, to exchange experiences with their counterparts from other regions through meetings, training sessions and field trips. Regular group meetings have become the primary forum for exchanging views. At the same time, new issues and policy matters are conveyed to members at leaders’ meetings. Members of the National Executive Council also visit remote groups and identify new problems. Early on, cases of mismanagement arose as some local groups experienced problems such as improper cash box maintenance. However, these issues were resolved through discussion, and through the formulation of self-imposed rules and operating guidelines. Through ensuring effective communications and sharing experiences, the Women’s Co-op has improved its services and developed the idea of social protection for its members.

Community-initiated social security schemes The standard credit programme available at the Women’s Co-op includes loan packages that are specifically designed to contribute to member welfare in innovative

The Women’s Co-op in Sri Lanka 87 ways. For example, about 3 per cent of disbursed loans go to education, allowing members to purchase school textbooks, uniforms, bags, shoes and other necessities for school attendance. Under its system of tuition-free education, Sri Lanka has attained high levels of school enrolment. However, difficulties that low-income parents face in paying for numerous supplementary school items are reflected in the high drop-out rates of children from poor families. Initially, the Co-op started out by funding the production of school notebooks and other necessary goods. Then a loan programme was created to permit one entrepreneurial member from each branch to buy supplies in bulk from producer members, and then to sell these supplies at wholesale prices to other members. This innovation has been highly successful and no cases of school drop-outs among member families have been reported since the initiation of this practice. In addition, scholarships have also been made available. The schemes operated by the Women’s Co-op also benefit members through income protection and community-based health care. These are discussed in more detail below. In addition, the Co-op started a special programme for female tsunami victims and their families immediately after the 2004 disaster. This collective experience proved to be of significance for newly resettled Tamil women facing especially difficult circumstances in the North. Life insurance It was noted earlier that the possibility of helping members with their financial needs following a family member’s death was discussed in the early days of the Women’s Coop. Initially, a mutual help system called Subhasadhaka was established to defray the cost of funerals and provide other benefits to needy dependants. Subhasadhaka was a pooled welfare fund into which members contributed around 10 rupees per month. However, when it came to making payouts, no one knew exactly how much a member should be entitled to receive. Eventually the Co-op decided that, based on member contributions, it could afford to provide a minimum of 1,500 rupees as a ‘death donation’ to defray burial costs, even though this was not enough to cover actual funeral expenses. In 1993, the Co-op structure was decentralized and the management of welfare funds became a branch matter. Collections for the welfare fund, largely allocated for funeral and wedding purposes, varied markedly from one branch to another. Besides the branch welfare funds, many groups maintained their welfare funds by regularly collecting from members, by organizing fundraising fairs and receiving voluntary donations from members when they were awarded larger loans. These funds were also used as a buffer against possible default, and also as loan capital for interest-free emergency loans. Co-op members repeatedly faced with the problems and limitations of the Subhasadhaka system had long expressed an interest in standardizing and increasing the level of the ‘death donation’. Contributions to the common welfare fund were generally so small that some members often forgot to pay for months at a time, while other members in some rural areas could not even afford to pay even such a small amount before the harvest. In both of these cases, members were

88 Mitsuhiko Hosaka and Nandasiri Gamage automatically disqualified from receiving benefits. Second, contributions and entitlements varied widely among different branches, making the system inequitable. Third, from a managerial point of view, it would conceivably be more convenient for the Co-op to receive larger sums of money at one time rather than small amounts on a monthly basis. This would also help overcome the chronic shortage of loan capital at each branch. Therefore, in 2000, a new insurance fund scheme called Subhani (‘welfare’) was started following a three-year survey of the incidence of deaths among Co-op members and their families. Under this scheme, once a member deposits 3,000 rupees into the fund, the family is entitled to receive 5,000 rupees when she dies. If a family member designated in the policy dies, the account holder receives 4,500 rupees if she has been in the programme for under five years; 7,500 rupees if she has been in the programme for five to nine years; and 10,000 rupees if she has been in the programme for ten years or more. Currently, the average cost of a funeral is around 5,000 to 10,000 rupees. The 3,000-rupee premium deposited into a member’s Subhani account stays with the local branch and earns 2 per cent interest per month, or 60 rupees monthly. From this earned interest, 10 rupees go into a compulsory savings account established in the member’s name, 49 rupees to the common welfare fund, and 1 rupee goes to the Co-op’s management as a Subhani membership fee. This is a one-time payment and the member does not need to make any additional weekly contributions (previously 5 rupees), or independently contribute to the common welfare fund. As of August 2009, the Subhani I fund reported 28,833 accounts across the nation, equivalent to an accumulated total of 94.9 million rupees, and showed an 80 per cent growth in its membership over the past three years. The monies kept in the fund are used as loan capital within each branch. In Subhani’s early years, the 3,000 rupee premium was non-refundable. However, after a branch leader introduced a proposal for a refundable system in the event of a member leaving the Co-op, the National Executive Council amended the rule and today deposits are refunded if a member resigns from the Co-op. Recently, this programme has been augmented by the introduction of Subhani II and III in order to further increase member benefits. With these new accounts, in combination with Subhani I, a member receives upwards of 25,000 rupees in the event of the death of a covered family member. However, so as to ensure the financial viability of branches and their members, only Rakhitha members (see below) are eligible to join Subhani II. Furthermore, Subhani III entitles members to free funeral services in the case of a death in the family, plus a 50,000 rupee savings deposit into her children’s accounts. Survivor’s pension Nearly a decade passed after the need for assistance for bereaved family members was first raised at a local meeting, until the new Rakhitha (‘Protection’) scheme was introduced in 2003. To join the Rakhitha scheme, a member must have been in the Subhani I scheme for a minimum of 120 days. Under the scheme, members are asked to insure the primary breadwinner of the family (the rakhithaya) and to

The Women’s Co-op in Sri Lanka 89 pay a 5,560 rupee premium. The rakhithaya could be the member herself. However, rakhithayas cannot be younger than 18, but they need not undergo prior medical examinations. Even if a rakhithaya has health problems, she is covered provided that she is the household breadwinner. Of course, husbands and other males who are breadwinners can also be designated as the rakhitha so that the family is protected from falling into poverty if the breadwinner dies. If a member finds it difficult to pay the 5,560 rupee premium in one instalment, a loan may be secured from the branch to pay the premium. In cases where the designated rakhithaya dies, is seriously disabled or blinded, or is otherwise rendered incapable of earning a living, an insurance benefit of 50,000 rupees is credited to the member’s Rakhitha account or to the account of a designated beneficiary. Interest on this account accrues at an annual rate of 21 per cent. The beneficiary is not able to withdraw the capital sum but has access to accrued interest; thus the fund resembles a permanent savings account, providing a steady income flow like a pension. The branch collects individual premiums and keeps them in a reserve fund for covering insurance payments. However, the fund is also used by the branches as capital for larger loans typically amounting to 2,000 rupees or more which are used for income generation or housing. Larger loans bring in an interest of 2 per cent per month. If a member leaves the Women’s Co-op, she may withdraw her premium if she has not received insurance. However, the Co-op encourages members to transfer Rakhitha accounts to their daughters, rather than taking refunds. By doing so, the account serves as an asset and as inheritance which few poor women can leave. Moreover, the welfare fund represents a considerable investment by poor women in the local community. If a member already has a Subhani II account, she may open a second Rakhitha account (Rakhitha II) and double the benefit she or her family receives. As of August 2009, a total of 9,139 members had Rakhitha accounts. Although this programme is judged to be a success, it has some limitations. Whereas the Subhani scheme is a straightforward funeral expenses insurance scheme, Rakhitha is a more ambitious and complicated scheme which some Coop members find difficult to understand. Furthermore, some branches are not sufficiently well organized to reliably implement a complex scheme of this type. Branches in the early stages of development are not permitted to start their own Rakhitha until they have achieved full branch status. Their ability to do so is also assessed by the National Executive Council. Generally, approval is granted when a branch of twenty or thirty experienced groups, with total assets of 10 million rupees or more, wishes to launch a Rakhitha scheme. Medical care and other insurance schemes Branches of the Women’s Co-op are given the option of opening Aarogya (‘health’) accounts. Members pay a 10-rupee enrolment fee and then contribute 100 rupees per month for the next fifty months. At the same time, the branch pays a match of 10,000 rupees into her Aarogya account. Therefore, by the end of her initial

90 Mitsuhiko Hosaka and Nandasiri Gamage contribution period, the account holder will accumulate 15,000 rupees in her account. From then on, she is entitled to free medical services such as eye operations and hospitalization costing up to 400,000 rupees. This programme developed out of members’ aspirations to have access to affordable and decent health care. Many members believe that health posts operated by the government are unreliable and private clinics and hospitals are unaffordable. The creation of the programme was also prompted by the Cooperative Societies Law which requires cooperatives to allocate a portion of the dividends for common welfare purposes such as public health. The programme was launched in 2003 when the Co-op, assisted by medical professionals and experts, created a special health services budget and established its own community health clinics served by ayurveda doctors and nurses. Some of the members’ children have also been trained as nurses and medical aides. At present, every branch of the Women’s Co-op designates one member of its management board as a health commissioner, and some branches, in collaboration with local public health stations, manage diabetes and cancer detection diagnostic checks for members. Under the current system, it costs 30 rupees for an Aarogya account holder or a member of her family to visit a Women’s Co-op health post. Additional costs for diagnosis and medicine are subsidized by the branch office. Each branch also reserves the right to collect and mobilize monies in Aarogya accounts for normal loan purposes. Starting soon, the Women’s Co-op plans to have interest accruing in Aarogya accounts at local branches transferred to the Co-op’s centre in Colombo in order to fund the maintenance of health posts, making this its only centrally managed programme. Members cannot withdraw money from an Aarogya account, but they may transfer their accounts to a child or relative. The Co-op is currently increasing the number of health posts and trained nurses, and planting herb gardens for ayurvedic treatments. As of August 2009, Aarogya accounts were held by a total of 16,877 members. At the present time there are several other insurance schemes, including a maternity benefit scheme, an allowance for bereaved children (Sarani) and an oldage lump sum benefit (Sendewa). Together they constitute a social safety net that protects Women’s Co-op members and their families from a variety of risks. Disaster relief Following the devastating tsunami of December 2004, the Women’s Co-op mobilized quickly to help its victims. The first step was to introduce an accelerated group recruitment approach to help form new groups of tsunami victims. This was done by easing the Co-op’s membership rules so that the eight-month probationary period usually required of new groups was waived, allowing victims relatively quick access to membership. This process was achieved through intense community organizing efforts. The second course of action was to admit new women facing special needs into existing groups, pending the approval of the National Executive Council. This measure effectively put women on the fast track to receive loans, thereby eliminating the waiting time required of new members

The Women’s Co-op in Sri Lanka 91 before being considered for housing and other larger loans. In addition, members struggling in the aftermath of the tsunami were given access to a special loan package established from emergency funds provided by external donors. The package consisted of loans offered at a reduced interest rate of 1 per cent per month and, while they were available for any reasonable purpose, the loans could be readily applied for housing and income generation. Furthermore, members with loans of up to a certain amount were granted interest-free loans for a period of one year with a three-month grace period. Because of these special schemes, the number of Co-op groups rapidly expanded throughout the country’s tsunami-affected areas. This indicated that these efforts were successful and that a sustainable model backed by proper organizational support could provide effective relief. The Co-op’s leaders were assigned to assist the new branches in the affected areas. In one district on the east coast, for example, 113 new groups, both Tamil and Muslim, were established and regrouped to form several new branches. Special loan packages totalling 50,000 rupees were allocated from emergency funds in September 2005 to each of these branches. Loans distributed to individual members ranged from 2,000 to 10,000 rupees. One woman deemed to be the most needy by other members was awarded a maximum loan amounting to 10,000 rupees. She had lost her husband to the tsunami, and had three children to care for. Although she had no prior experience of applying for or managing a loan, she used the funds to open a small shop. She was able to repay the loan within a year. Other members used their loans for fish vending, sewing machine repair and making potato chips, among other things. However, tsunami-affected Co-op members soon became aware of some operational problems posed by the special loan packages. Waiving loan interest meant depriving Co-op branches of a resource that would otherwise allow them to allocate interest to members’ savings accounts. Furthermore, Co-op branches were prevented from creating welfare funds, since welfare funds could only be sustained by the reinvestment of collected loan interest. Hence, the special package was eventually integrated into the Co-op’s standard services.

Integration with the statutory system The Women’s Co-op shows how local, poor communities can organize themselves to promote their livelihood. Services provided in a top-down manner often fail to meet the needs of poor communities. The government’s Samurdhi povertyalleviation programme is an example of the top-down approach which failed to reach target groups, while the Co-op demonstrated the ability to identify genuinely neediest members through their group discussions. Even where government services are well designed and comprehensive, the goal of achieving inclusive development requires that local communities participate fully and initiate as well as implement programmes. This does not mean that community-initiated programmes should operate in isolation from governmental and nongovernmental services. Indeed, it is highly desirable that partnerships between local communities and external agents be established.

92 Mitsuhiko Hosaka and Nandasiri Gamage At times, the Women’s Co-op draws on external resources and successfully fosters partnerships with external agents. It did not develop its programmes in a vacuum. These programmes were established on its own initiative but operate within the framework of its own rules and governance structures. Furthermore, the Co-op registered with the government under the Cooperative Societies Law, and it benefited from management advice from the government’s Cooperative Department, which also helped facilitate the establishment of its health and pension programmes. In addition, it secured legal status, and this was conducive to its expansion and effectiveness. The government has been receptive to the Co-op’s needs and flexible in recognizing its activities which do not always fall within the limited parameters of its rules and regulations. However, the Women’s Co-op would benefit greatly from additional external funding. It does not employ any full-time workers and members provide support to new groups at their own expense. Since the Co-op’s activities are constrained by legislation, it cannot use its regular funds for community organizing and this hampers the expansion of its programmes. If more funds were available, a larger number of poor women and their families could be covered by its microinsurance programmes. It consistently faces shortages of capital for loans, and although it has received help for some activities such as the tsunami emergency relief programme, it would benefit from having a more secure financial base. This may be achieved through greater integration of its activities with the formal social security system. One development, which is indicative of greater collaboration between the Coop and the government, is the provision of services to Tamil women and their families who were displaced by the conflict in the north of the island. Members based in Colombo travelled to the resettlement area to promote the Co-op and its activities and to offer support. In addition, a series of study visits to well-established Co-op groups were arranged. Before long, local groups among the displaced women emerged. However, these groups could not have grown only through savings schemes, and in this regard the government’s rehabilitation programme which sought to promote community participation in the resettlement areas was of strategic importance. Funds for small infrastructural development were allocated to local community groups, and these made a significant contribution to promoting the Co-op members’ economic viability. Subsequently, members of the new groups were able to open savings accounts and secure small loans. A number of its members expressed strong interest in starting the Subhani programme. Several other examples of effective collaboration with government agencies can be given. One noteworthy initiative is a community-based water supply and management system, which was established by a Co-op branch in Colombo through a contract with the government’s National Water Supply and Drainage Board. A local NGO called Sevanatha provided technical support. The construction project, implemented by a branch member, installed water supply connections to homes in their informal settlement and, in addition, a local branch member living in the area acted as a water manager, collecting user fees and paying monthly bills to the Board. Because of this arrangement, the Board charged a lower bulk rate, at a significant saving to the community. Until any fee collector came from the Board to the area,

The Women’s Co-op in Sri Lanka 93 the collected fees were used as loan capital for new credits that branch members could use. This project is an example of an infrastructural development programme that the Women’s Co-op can manage with the government and shows how effective collaboration with external agents can facilitate activities and promote the wellbeing of its members.

Achievements and future potential These examples reveal that the Women’s Co-op is not only effective in offering income protection programmes, but is able to address collective issues such as disaster rehabilitation, resettlement and community infrastructural development. The Co-op has been able to cultivate a culture of participation and to harness the power of people’s commitment and mutual support. When members are asked why they give such high priority to the poorest women in their groups, they often reply: ‘It is our culture to help each other’ and ‘People who are better off can avail themselves of many credit and insurance opportunities. Our programmes should serve the poorest.’ In fact, existing patterns of mutual support are reinforced by the Co-op’s activities. New members who join groups are often very cautious and reluctant to talk about themselves and their needs for fear that they may reveal intimate family details, which could result in a loss of status and respect. However, as the groups evolve and members become more familiar with each other, they speak frankly and elicit the support of other members. The relationships that emerge among women are not only important for the functioning of the groups but for the sustainability of their programmes. This chapter has shown that the Co-op’s activities are not limited to the provision of microfinance but affect the lives of poor women in many different ways. These programmes alleviate poverty, build confidence among women and improve social conditions in local communities. In addition, the Co-op does not merely deliver income protection services but promotes social investments. Women are able to accumulate resources which may be used to promote their own well-being and that of their family members. As the groups grow, they mobilize more resources through the returns generated from their loans and these become an asset to the Co-op as a whole which may be used for further investments. The Co-op has also been involved in organizing joint cultural promotion activities, training and education programmes, disaster relief and preparedness projects, collective agriculture, community health care, and various other activities that contribute to the well-being of local women and the community as a whole. It is not correct to assume that the good performance and rapid expansion of the Women’s Co-op can be attributed solely to the organization’s culture of mutual support. Members are fully aware that the income protection they enjoy is based entirely on the savings they have accumulated in their individual accounts. Although the Co-op has facilitated participation and mutual relationships among women, the savings of its poorer members are not subsidized and, accordingly, its social protection scheme has no mechanism for internally redistributing resources. This is where the integration of the Co-op’s programmes with the larger system of

94 Mitsuhiko Hosaka and Nandasiri Gamage government social protection is called for. If the government’s social security scheme more clearly addresses the needs of the poorest members of society, and if the government would work with the Co-op to channel resources to its welfare programme, then resource redistribution would be attained and national policy would effectively complement the organization’s investment-based safety net schemes. While the Co-op will undoubtedly continue its important work, its future role will depend on the level of integration it achieves with the government’s social security system. In this way, its potential to contribute significantly to social protection may be realized.

References Abeyratne, S. (2002) ‘Economic Roots of Political Conflict: The Case of Sri Lanka.’ Australian National University Department of Economics Working Paper 2002/01. Athukorala, P. and Jayasuriya, S. (1994) Macroeconomic Policies, Crisis, and Growth in Sri Lanka, 1969–90. Washington, DC: World Bank. Castells, M.(1983) The City and the Grassroots. Berkeley: University of California Press. Gunatilaka R. and Chotikapanich, D. (2006) ‘Inequality Trends and Determinants in Sri Lanka 1980–2002: A Shapley Approach to Decomposition.’ Monash University Department of Econometrics and Business Statistics Working Paper 6/06. Jayasuriya, L. (2000) Welfarism and Politics in Sri Lanka. Perth: University of Western Australia. Peiris, G.H. (1996) Development and Change in Sri Lanka: Geographical Perspectives. Delhi: Macmillan India, Ltd. Sen, A. (1981) ‘Public Action and the Quality of Life in Developing Countries.’ Oxford Bulletin of Economics and Statistics 43(4): 287–319. UNDP (2007) Human Development Report 2007/2008. New York: United Nations Development Programme. Vidanapathirana, U. (2007) ‘Emerging Income Inequality and Widening Economic Divide: The Case of Sri Lanka 1977–2006.’ Paper presented at international conference and workshop on Policy Perspectives on Growth, Economic Structures and Poverty Reduction held in Beijing, China, 3–9 June. World Bank (2006) Sri Lanka: Strengthening Social Protection, Part 1. Available at http://siteresources.worldbank.org/INTSOUTHASIA/Resources/Sri_Lanka_Social_Prot ection_Report_2006_partI.pdf.

6

Social security through community welfare funds in Thailand Panthip Petchmark, Somsook Boonyabancha and Mitsuhiko Hosaka

In the Thai language, the word baan means ‘house’. However, throughout Thailand’s rural areas, the term baan sometimes refers not to an individual house but to an entire community. It symbolizes the community’s social networks and ability to provide protection, basic needs and a framework for transmitting wisdom and traditions. Baan represents an extension of the family unit into the community. As in many other Asian societies, the community has long served as a basic social welfare system. Until recently, social protection was not high on the political agenda in Thailand. It was only after the late 1980s that the government became seriously interested in social insurance and similar programmes. Nevertheless, coverage remained largely limited to employees in the formal sector. At the time of the financial crisis of 1997, the limitations of the existing social security system were recognized, as so many vulnerable people experienced serious hardship. In response, since the turn of this century, urban and rural poor communities have worked out a variety of mechanisms for implementing their own social protection based on savings and community funds. This not only represents the revitalization of the traditional baanbased mutual help system but brings a new holistic approach to social development that is more appropriate to Thai culture. This chapter examines various community social protection initiatives of this kind and discusses the role of government agencies in supporting these activities. It also considers the implications of these developments for strengthening citizen–government partnerships that can foster the emergence of a comprehensive social security system in Thailand.

Thailand and its statutory social security system Thailand is a kingdom located in Southeast Asia. Unlike its neighbours, the country was never colonized by the Western powers. In 1932, the kingdom evolved from an absolute monarchy into a constitutional state, but it has faced frequent military coups since then. In 2005, its population was approximately 63 million, of which 95 per cent are Buddhists. Buddhism is Thailand’s state religion. About 4 per cent, largely people residing in the southern peninsula along the Malaysian border, are Muslims. Population growth declined from 3.1 per cent in 1960 to 1965 to 0.66 percent in 2005 to 2010. This is partly attributable to

96 Panthip Petchmark et al. successful government-sponsored family planning programmes. Due to the government’s commitment to public health, life expectancy now stands at 69.6 years, which has resulted in a rapidly ageing population. Citizens aged 65 and over represented 7.8 per cent of the population in 2005 and this figure is expected to reach 14 per cent within twenty years. The greater Bangkok metropolitan area contained twelve million people in 2008, yet Thailand as a whole is still predominantly rural. The urban population constitutes less than one-third of the total population. In the 1970s and 1980s, the Thai government pursued agricultural development and agro-industrialization policies but, in the late 1980s, the country received sizeable foreign investments in the wake of the US dollar’s sudden depreciation which spurred the development of new manufacturing sectors. From 1988 to 1995, the Thai economy grew at a rate of 9.5 per cent annually, mainly due to the boom in urban export industries. This resulted in a property boom and rising incomes, but the economic bubble burst with the financial crisis of July 1997. The growth rate fell to -10 per cent in 1998. Unemployed urban workers moved back to the rural areas in large numbers. The government introduced a series of measures ranging from financial reform to the introduction of social safety nets. The economy revived in the 2000s and per capita GDP reached US$8,600 in 2005. Still, 43 per cent of the total labour force was employed in the agricultural sector while industry’s share remained at 20 per cent. The United Nations Development Program (UNDP) (2007) estimates that 72 per cent of non-agricultural workers were employed in the informal sector in 2002. As noted earlier, social security and related social protection programmes were not a high priority for the Thai government until the 1980s. At the time, the government focused on promoting economic growth while keeping labour costs low and severely limiting welfare budgets. Exceptions were made for civil servants, military personnel and employees of state-run enterprises. In 1951, a noncontributory pension scheme for civil servants had been developed and, to this day, civil servants and their dependants are generously catered for by social security schemes that provide retirement pensions, disability benefits, maternity allowances and medical services. In 1932, when the constitutional monarchy was established, attempts were made to introduce a comprehensive social security programme but these proved to be unsuccessful. Parliament passed the first social security law in 1954, which covered disability, sickness, maternity, old-age and bereavement benefits. However, it was never implemented due to political opposition. In 1990, following the economic and social changes of the 1980s, the statute was finally adopted and implemented. This was to meet the demand from the growing urban labour force and middle class which had emerged as a result of the country’s rapid economic growth. At the same time, the problem of urban poverty became more serious, and during the late 1980s it became an important part of the government’s policy agenda. Decha (2000) notes that attitudes had changed so drastically that few expressed any opposition to the legislation, which was passed in 1990. During this time, the trade unions, many social organizations and intellectuals lobbied for its enactment. Employers also

Community welfare funds in Thailand 97 supported the legislation, believing that the new system would lighten their obligations to meet the needs of workers such as those previously imposed by the Workmen’s Compensation Act. Private insurance businesses that had once objected strongly to the introduction of a compulsory insurance programme now understood that the new system would leave the commercial insurance market for higher income earners intact. Immediately after the enactment, there was political turmoil in Parliament followed by a military coup. Nevertheless, the Act survived and is currently enforced by the government’s Social Security Office (SSO). The Act provided wage workers a legal entitlement to social security, provided they are employed at registered firms with at least twenty employees. Over the years, coverage has grown gradually and now includes all employees at registered enterprises between the ages of 15 and 60. To finance the scheme, a tripartite contribution system was adopted whereby insured parties and employers each contribute payments amounting to 3 per cent of their wages. The government contributes 1 per cent. The programme provides for old-age pensions and family benefits. An additional 1.5 per cent is levied for sickness, maternity and bereavement benefits. The self-employed may voluntarily join the scheme. The old-age pension, introduced in 1998, requires a minimum of fifteen years’ contributory service. Hence, the first benefits will not be received before 2014. However, it is estimated that these benefits will fall below the national poverty line. They will be far less than those paid under the civil service pension scheme. In addition, questions have been raised about the financial viability of the system itself. Today, there are four major social security schemes in Thailand. The first is the Civil Service Scheme which includes a non-contributory pension scheme and a non-contributory civil service medical scheme providing free medical care for state civil servants and their dependants. In addition, there are separate provident funds for military personnel, university staff and other government officials. The second is the State-Owned Enterprise scheme which provides pensions for those employed in the country’s public enterprises. The third is the Private School Teacher Welfare Fund and finally, there is the scheme administered by the Social Security Office. This scheme was described earlier. In addition to these programmes, the government has also created incentives to encourage larger enterprises to establish provident funds for their own workers. The International Labour Organization (ILO), the Social Security Office and the National Statistics Office (2004) estimate that the number of employees and dependants covered by the Civil Service scheme was 5.4 million, and those covered by the State-Owned Enterprise scheme and the Private School Teacher Welfare Fund were about 600,000 and 100,000 respectively. Finally, the Social Security Office scheme had a membership of about 6.7 million. When combined, these amounts represent about 20 per cent of the country’s total population. Of the fifty-one million people who are not covered by these schemes, about a half are either not in the labour force or under 15 years of age. The remaining twenty-six million include self-employed (10 million), unpaid family workers (7.5 million) and private employees (6.4 million). Many small enterprises either do not qualify for registration with the Social Security Office because of their small size, or they evade paying contributions. Unstable and

98 Panthip Petchmark et al. temporary employment contracts also contribute to a lack of coverage. A majority of non-covered urban workers are in the informal sector, while farmers and fishermen constitute 56 per cent of the non-covered workers. Government provisions have focused on medical services. In 2004, public expenditure on health was 2.3 per cent of GDP (UNDP, 2007), the highest in Southeast Asia. In terms of health insurance, both the Civil Service and Social Security Office schemes can be utilized for cash payment or in-kind medical services. The Ministry of Health has also taken steps to promote universal health coverage. One well-known strategy is the 30-baht scheme, introduced in 2001 to ensure that people not covered by the formal social security system have access to hospitals and clinics for a payment of only 30 baht per visit. In 2006, the 30-baht co-payment for medical visits was reduced to zero. In a 2003 survey of how Thai citizens financed their medical expenses, the International Labour Organization in conjunction with the Social Security Office and National Statistics Office (2004) estimated that approximately 20 per cent used medical benefits from social security. Namely, 8 per cent used the Civil Service scheme, 10 per cent used the Social Security Office scheme, and 2 per cent used private insurance. A large majority of those surveyed (74 percent) used the 30-baht scheme. In addition to these schemes, Thailand has a social assistance scheme which is administered by the Public Assistance Department. This scheme was introduced in 1940 by the Prime Minister Po Piboonsongkram. Since then, social assistance has been extended to a few special groups of needy people. While this scheme provides a measure of social protection, it is limited in coverage and is seriously constrained by a lack of financial resources. There are also insufficient professionally qualified workers in the system. Government spending on public assistance and social work comprises less than 1 per cent of the government’s total annual budget. Around twenty nursing homes accommodate about 3,000 senior citizens nationally. Approximately thirty children’s homes catering for Thailand’s orphans, abandoned children and juvenile delinquents have been established. About 70,000 elderly people living in poverty receive cash allowances of 300 baht per month. Disabled people, who are unemployed or destitute, receive a monthly allowance of 500 baht, which is not nearly enough to meet their needs. It is assumed that the disabled, the elderly and other needy people will live with their families, who will support them. Social workers administer the social assistance scheme at the local level. However, most families know very little about the public assistance programme and the identification of potential beneficiaries often involves village elites who do not always objectively identify the needy. Thailand’s rapidly ageing and changing society places new and growing demands on social security but the system fails to cover the majority of the population. As noted above, it largely covers government employees, the wealthy and middle-class people, and workers in the formal sector. Some 80 per cent of the population, including vulnerable rural and informal workers, are not protected. Because the financial sustainability of the system is in doubt, it is questionable whether topdown social security service delivery can be extended to cover all of those working in agriculture and the urban informal sector. Government support for community-

Community welfare funds in Thailand 99 initiated and development-oriented social protection programmes may offer a viable alternative for achieving universal social security coverage.

The Community Organization Development Institute and the community welfare funds Traditional Thai culture has for many centuries shaped the ways community members extend support to each other in times of food shortage, ill-health, funerals and other challenges. Buddhist temples have also played a key role in promoting community welfare. Southern Thai Muslim communities have established their own welfare systems based on Islam. Particularly over the past twenty years, these various institutions have provided survival strategies for many poor people. In the late 1980s, the central government’s Community Development Department established a rural community savings programme. It was an innovative effort, but standardized rules and procedures had to be adopted. While some savings groups grew strong and evolved into nationally known movements, others were not so successful. In notable cases, success was due to the flexibility of insightful leaders who adjusted the saving rules and management structures to suit local conditions. For example, Kru Chop Yodkaew, a senior community leader in a village in the southern province of Songkla, formed a community bank by uniting several different savings groups. The bank provided expanded opportunities for people to open savings accounts and gain access to credit. Not long after the bank was established, it used some of the interest it had earned to offer welfare benefits to its members. This development, together with several other pioneering community initiatives, inspired numerous other rural communities to launch similar programmes. There were similar developments in the urban areas. At this time, large-scale private investment in the urban redevelopment of Bangkok produced new housing stock for urban middle-income groups. It also commercialized the land on which informal settlements had been established, but this increased the homeless population and forced them to sleep on streets and under bridges, something that the city had not seen before. Ockey (1996) estimated that more than 25,000 poor households in Bangkok faced evictions from informal settlements in the early 1990s. As urban poverty and widening disparities became a national political issue, the government established the Urban Community Development Office (UCDO) in 1992. The Office managed a newly created development fund with initial capital of 1.25 billion baht (about US$31 million in 1992). It assisted urban low-income communities in organizing, planning for settlement development and setting up savings activities. Based on local plans, the Office provided low-interest loans to savings groups. In turn, these groups issued credit to individual members under terms decided by members. Using a portion of interest from loans, community funds were established by savings groups. By 1997, the new system covered a quarter of the country’s 2,100 urban informal settlements, and a total of 400 million baht was loaned out for income-generation projects, land purchases, housing development and community-based revolving funds.

100 Panthip Petchmark et al. The Asian financial crisis of 1997 resulted in growing unemployment, falling incomes and rising debt throughout Thailand, and many savings groups suffered, since they had difficulty in recovering the loans they had issued. These repayment problems were not, however, caused solely by the financial crisis, but were indicative of internal weaknesses in the way the loans were administered. To enable the savings groups to rebuild their management structures and begin lending again under more flexible terms, the Urban Community Development Office established an emergency relief fund to boost the savings groups and help them meet their needs. It also provided opportunities for savings groups to share experiences and support each other. As a result of these efforts, many small saving groups formed larger federations, which spread throughout the country. The Office then began to work with these federations rather than the local savings groups and it disbursed resources to these new partners instead of to individual communities. To ease the effects of the financial crisis and to facilitate recovery, external assistance was extended to the government of Thailand by the World Bank through its Social Investment Fund. In 1998, the Office began to work closely with the Fund to establish new networks of savings groups and encourage them to develop their own policies and procedures which would be responsive to local community needs for social protection. Some eighty networks held meetings, a number of communities conducted surveys and discussed their findings, and activities that would benefit vulnerable and disadvantaged members were planned. Proposals were screened by network members and new ideas were widely shared. A wide range of different programmes addressing people’s needs were established. These included children’s scholarships and interest-free loans for school fees, grants and loans for needy seniors, medical subsidies, grants for HIV-positive citizens, drug rehabilitation programmes and loans for the unemployed or disabled to establish income-generating projects. By 2002, nearly 40,000 families in approximately 1,000 urban communities had benefited from this programme. In time, the programme spread to many more communities and was integrated into existing community savings and credit activities. Today, community welfare funds, which use interest from loans to finance their social protection programmes, may be found throughout Thailand. In the rural areas, a fund established by the government, known as the Rural Development Fund, had assisted villagers to initiate local development projects since 1984. In 2000, this fund was merged with the Urban Community Development Office to form a new organization known as the Community Organization Development Institute (CODI). Unlike the Urban Community Development Office, which operated as a special project of the National Housing Authority, CODI was given legal status as an autonomous public entity. This gave CODI easier access to the government budget and more flexibility in working with both urban and rural communities. This development also facilitated the exchange of experience between urban and rural communities and has resulted in greater participation in its programmes. In 2000, the Institute created an Elderly Welfare Fund with partial assistance from the Miyazawa Fund in Japan. The Elderly Welfare Fund provides for a variety

Community welfare funds in Thailand 101 of local social service activities for elderly people. A national committee was established to coordinate the new programme comprising representatives of elderly members of low-income communities from the five Thai regions, officials from the Welfare Department, and other government agency representatives as well as academics. Since a large number of community-based associations of seniors already existed around the country, they were brought together to conduct needs assessments and design programmes at different levels including community, provincial and national levels. A total of 80 million baht was then disbursed to Thailand’s seventy-six provinces. The provincial committees of elderly members each received a grant of 1 million baht to establish a welfare fund and implement their own social services. Existing local savings groups comprising elderly people were mobilized and, in most cases, their members decided to contribute about 10 baht each per month to boost the provincial funds. A portion of the interest derived from existing community savings and credit schemes was also added to the funds. Typically, each fund had three components. One portion of the fund was used to support seniors’ social activities, such as exercise groups, temple visits and musical performances. Another was allocated to provide medical subsidies, supplementary foods, health care and funeral expenses. The third and most substantial portion was set aside in a revolving fund for income-generating projects that augmented the provincial fund. This also gave many groups an opportunity to leverage additional local resources. Local savings groups also worked with the Social Welfare Department to link existing government programmes more closely with their activities. As a result of these efforts, CODI recognized that community-managed savings funds were an important way of addressing local welfare needs. In 2005, it received a grant from the National Poverty Eradication Programme and was able to use this grant to increase the number of savings groups in the country. As the programme spread, groups and networks were organized at the tambon (subdistrict) level and these groups established their own welfare schemes. The programme was implemented on an experimental basis in fourteen tambons, and since it proved to be successful, it was expanded to cover 191 tambons which were allocated seed capital of 100,000 baht to establish local welfare funds. Within two years, 78 per cent of all villages and urban communities in these 191 tambons were covered. By this time, the total value of funds allocated to the pilot programme had more than quadrupled to 79.6 million baht. This included 3.2 million baht in contributions made by the local tambon authorities themselves. The contributions from community members alone amounted to 57.3 million baht or more than 70 per cent of the total tambon welfare funds. Members had devised various ways to augment their welfare funds, of which the most popular involved each member contributing ‘1 baht a day’ to the fund. Often, existing local savings groups also contributed regularly to the tambon welfare funds. In addition, some groups realized that many grants previously allocated by various central government departments to the tambon authority, known as the Tambon Administrative Organization, had not been used and, in response, they mobilized local support for moving these funds into the local welfare fund. This

102 Panthip Petchmark et al. involved uniting different stake holders around a new commitment to improve the well-being of the community. The welfare funds also function as revolving funds for disbursing loans, since usually half of the interest earned on these loans is set aside to augment the fund’s capital. A major evaluation of CODI’s pilot programme produced positive results and showed that local people had introduced a great variety of welfare projects. Although there were significant differences in project focus between local communities, similar patterns emerged and these were facilitated by different groups collaborating and sharing their experiences with each other. One very popular innovation was the payment of maternity benefits of between 500 to 1,000 baht to all families with new-born babies. Another common practice was using tambon welfare funds to assist local people with medical expenses. Although most are covered by the government’s 30-baht health scheme, the funds helped them meet uncovered medical expenses up to a defined ceiling. Expenses for extended hospitalization, transportation, compensation for daily wages lost due to illness and the expenses of visiting family members were often covered. Some funds also paid special monthly allowances for disabled members of between 200 to 300 baht. Many welfare funds encouraged parents to save for education expenses by offering scholarships of between 500 and 3,000 baht per year provided they have accumulated a specified amount in their savings accounts. Students from poor families were offered grants and educational materials, and loans were often given to students, including those in universities and vocational colleges, with little or no interest. Most of the funds have also introduced contributory retirement pensions. In Songkla, members aged 60 and over are eligible for payments of 300 baht per month. However, since a minimum of fifteen years’ contributions is required to receive this pension, no member is yet eligible. Funds are also being used to support senior community activities and to supplement the savings accounts of the poorest seniors in the community. This ensures that all senior citizens are entitled to benefits. Finally, most of the tambon welfare funds provide funeral benefits. Cash benefits are awarded according to length of membership. Usually, a benefit of 2,500 baht is provided to the families of those who were members of groups for at least six months, while a benefit of 5,000 baht is paid the families of those who were members for at least one year. The families of those who were members for six years or more receive a benefit of 30,000 baht. Following the successful evaluation of the pilot programme, it has since been expanded to all the country’s provinces, with a maximum seed allocation of 40,000 baht for each tambon fund. CODI has placed emphasis on forging closer collaboration between local community members and the tambon authorities, using welfare funds as leverage. In addition to the elderly and tambon welfare funds, many other types of welfare funds now exist, with or without support from CODI, including those established in housing-improvement projects, the welfare fund activities of cooperative enterprises and village funds linked to natural resource management projects. These efforts have had positive results, since nearly half of all urban and rural communities in Thailand are now linked to CODI’s activities.

Community welfare funds in Thailand 103

Case study: Sajcha savings groups in Tambon Khamong In addition to the government-sponsored initiatives of CODI and other statutory organizations, a variety of mutual aid and savings groups have been expanded by local people themselves or by religious and nongovernmental organizations. It is estimated that there are currently about 80,000 community savings groups in Thailand, covering about ten million poor people. These groups operate in both the urban and rural areas and are governed in different ways and use different methods to promote saving among their members. In the urban areas, savings and credit activities are usually organized by one group for a whole informal settlement and members usually save on a daily rather than monthly basis since this permits informal sector workers to save regularly. In the rural areas, a few separate small savings groups may exist in a village. Although most of these groups function independently, many are now forming federations. Many are also becoming more formalized. Recently, religious savings groups have become more prevalent in Thailand. The temple acts as an organizational centre where groups come together once a month to manage savings, loans and other transactions. These temple-based groups may also oversee community enterprises and welfare funds. One example is the sajcha savings groups, initiated by a Buddhist monk named Phra Subin Paneeto from the eastern province of Trat in the early 1990s. The term sajcha means truthfulness and sincerity. Paneeto had studied the savings project undertaken by Kru Chop Yodkaew in Songkla province and adapted many aspects of this project. His approach was based on the Buddhist principles of truthfulness, self-reliance, mutual help, hard work and discipline. He defined savings and credit as virtuous communal activities. The movement began with the creation of a few savings groups in communities near his temple. Unique to the sajcha saving groups was the strong emphasis they placed on discipline. To instil discipline, applications for membership are accepted on only one day per year but once all the groups have been established, new members can only apply when a vacancy occurs. New members must learn and abide by the group’s rules and regulations. For example, if a member fails to repay a loan on the settlement date, the guarantor is responsible for paying the loan. Otherwise, the members who are supposed to receive loans on that day are collectively responsible to meet the debt. In addition to promoting savings, many groups engage in cooperative agricultural production and the manufacture of organic fertilizers and fruit juices. Special debt relief loans and various community welfare projects have also been introduced. As other temples and monasteries have learned about the sajcha groups established in Trat province, many more groups have emerged across the nation. This has been facilitated by monks who have visited Trat province or attended seminars designed to inform them about the sajcha groups. One example comes from Chanthaburi province, which is adjacent to Trat province, where a monk named Phra Manas Kantidrammo introduced the first sajcha group in 1996. By 2006, about 40,000 people out of the province’s total population of 480,000 had joined sajcha groups associated with 121 temples. In Chanthaburi province, groups formed network organizations or federations at the district level and their activities

104 Panthip Petchmark et al. are coordinated also at the provincial level. Provincial meetings are held monthly and on a rotating basis among the member groups. About twenty monks act as an advisory team at provincial meetings. To augment their activities the provincial network sought to obtain additional funds. They first approached the Tambon Administrative Organizations but had mixed results, but subsequently CODI approved a 2 million baht grant to the network to support the welfare funds. The network distributed the grant to twenty temple-based groups which each borrowed 100,000 baht to boost their fund activities for one year. After a year, the loan was repaid to the network at an interest rate of 24 per cent. The repaid amount including interest was then used to finance other groups, which took turns to receive capital loan funds. To provide further information about the activities of the sajcha groups, the following example of Tambon Khamong may be helpful. It is one of seventy-six tambons in Chanthaburi province and has a population of 2,800. It is located near the Gulf of Thailand where most people were previously engaged in farming and fishing, but extensive road and dam construction has brought ecological change that has affected people’s livelihoods. Many have since found employment in the local tile industry or shrimp-processing factories The tambon has two temples – Wat Khamong and Wat Samed Phosri – and sajcha savings groups were established in these temples in 1996 and 1999 respectively. By 2007, the Wat Khamong Sajcha savings group had a membership of 646 people, and the Wat Samed Phosri group had 989 members. When combined, these numbers comprise nearly 60 per cent of the tambon’s total population. Their assets amount to about 8 million baht each. Both sajcha groups have their own rules and regulations. Membership is open to those who have lived in the tambon for one year or more, and every member of a family may join. Each group is governed by a management committee of five members, but all members participate fully in decision-making. Each member contributes a fixed monthly amount of between 10 and 100 baht but the actual amount is decided by individual members. Savings accumulated in each member’s savings account are considered as ‘shares’ to which dividends accrue at the end of a year. Members may apply for loans at an interest rate of between 1 and 2 per cent per month, subject to the approval of the group. A penalty of between 10 and 20 baht is charged should a member default. Applications are prioritized depending on the needs of members. Those encumbered with expenses resulting from an illness are given top priority and those who need assistance to meet educational expenses are given second priority. New members may only apply for a loan after being enrolled in the group for a minimum of three months. They are entitled to welfare benefits after one year. Half of the interest on loans is contributed to the welfare fund, while the other half is distributed as dividends to savings account holders. As noted earlier, new members are only admitted to fill a vacancy, and they are required to purchase the total shares accumulated in the outgoing member’s savings account. In addition, since the welfare fund is communally shared by its members, new members must also contribute to the fund. When a new group is formed, not all members may be able to pay compulsory monthly contributions. Some are disabled villagers who are dependent on government benefits, while others are

Community welfare funds in Thailand 105 senior citizens receiving small government allowances. Since the groups wish to ensure that all members qualify for the same entitlements to welfare benefits, they often advise poorer members to use the government benefits to pay the compulsory contributions. The sajcha savings group associated with Wat Khamong, which is an ancient temple, has the active support of the monk Phra Nivas, who grew up in the tambon and is highly respected by the villagers. Concerned by the environmentally disruptive development projects that continue to be constructed in the region, he is particularly active in community affairs and in supporting the work of the group. He serves as the Chair of its management committee. The group meets in the temple on the twentieth of each month and meetings begin with a prayer and recitation of an oath of allegiance. Activities are then organized around three tables. The first table receives individual savings and handles bookkeeping. The second receives loan repayments and interest payments. The third disburses new loans which are based on the monies received. These transactions are usually completed over the course of several hours. According to the group’s rules, monthly repayments should not amount to less than 500 baht and loans have a ceiling of 50,000 baht. Most loans are used for agricultural improvements, to purchase fishing tackle, or to establish or expand small businesses. Traditional healers are invited to attend to offer herbal treatments to members if required. A meeting is also held at the end of each year, when the group’s profit income is transferred to its community welfare fund. Decisions about the group’s welfare programmes for the coming year are also discussed at this meeting. The community welfare funds managed by both sajcha groups have been used for a variety of purposes. For example, in 2006, the groups paid medical benefits amounting to 300 baht per night for hospitalization up to a maximum of sixteen nights per year. Members’ children who enrolled in secondary school received an education grant of 500 baht per year and in the case of five poor students, 1,500 baht was paid. Five college students from poor families were each awarded scholarships of 5,000 baht per year. Benefits of 184,000 baht were paid to assist bereaved family members to meet the costs of thirteen funerals during the year. Although the groups had not established pension schemes, they organized various social activities for senior citizens. Fortunately, the local Tambon Administrative Organization provides eighty elderly citizens with a monthly allowance of 300 baht and this has helped them maintain the membership of the welfare funds, as noted earlier. Welfare funds were also used to help supply lunches at two preschools managed by the tambon authorities. The combined spending from the welfare funds of the two groups amounted to 837,000 baht in 2006. About 23 per cent was allocated for medical benefits, 22 per cent for funeral benefits, 7 per cent for scholarships and 31 per cent for various community activities including village fairs, cultural functions and recreational activities for the elderly. Sixteen per cent was spent on allowances for committee members and 1 per cent on stationery and miscellaneous expenses. These two examples show that savings groups and community welfare funds based on Buddhist teaching have helped village people to save and have access to

106 Panthip Petchmark et al. affordable credit. The groups have also helped local people organize, improve their collective decision-making and provide a variety of community welfare services to those in need. Their activities have built community solidarity and established an ongoing process of mutual help and support. They provide a collective mechanism for local people to assess social needs and address ongoing vulnerabilities.

Policy implications Although Thailand is a rapidly industrializing country, much of its development is still dependent on rural economy. Although agriculture contributes only 11 per cent of GDP, 68 per cent of the total population live in rural areas and 43 per cent of workers are engaged in the agricultural sector. Poverty remains widespread in rural areas. Jutsuchon (2004) proposed a new poverty line and estimated that 18.5 per cent of the rural population in 2002 lived below that line. On the other hand, rural population growth has been moderate, and senior citizens have increased as a proportion of the population. Service provision and the social integration of the growing number of low-income senior citizens has become a crucial policy issue. Meanwhile, new threats to people’s social security pose increasing demands. For example, Thailand’s 1.7 per cent HIV prevalence rate among citizens aged 15 to 49 is one of the highest outside Africa (World Bank, 2009). As noted earlier, governmental social protection programmes fall into two major categories. The first comprises conventional social welfare services and public assistance. The public assistance scheme pays cash allowances to the poor and needy senior citizens, but it has been seriously limited by financial and human resource constraints. Thus, apart from the free medical scheme, the impact of conventional social welfare services has been minimal and welfare programmes cannot effectively provide services that target the most needy sections of the population. Social insurance schemes comprise the second category of social protection programmes. These schemes emerged as the country experienced rapid economic growth and they cater primarily for the urban middle-class population and those who are employed on a regular basis in industries and commercial firms. In strictly legal terms, farmers and employees of small enterprises also qualify for membership of these schemes but in reality, most remain uncovered. This is also true of the majority of urban informal sector workers. Taken together, statutory provisions and commercial insurance are only available to the wealthiest section of society. These disparities need to be addressed if Thailand is to experience inclusive social development. In order to reach the informal and rural sectors and achieve universal coverage, an innovative and unconventional approach is needed. As has been shown already, people in urban and rural communities across the country have assisted each other in different ways. They have kept the country’s ancient culture of mutual assistance and the notion of baan alive. This chapter has also shown that new savings and credit groups, as well as community-managed welfare funds, have emerged around the country. These initiatives are rooted in the existing culture, and strengthen and enrich that culture. Based on an assessment of their needs and their social and cultural circumstances, local people have united

Community welfare funds in Thailand 107 to establish their own community welfare funds and to respond to social needs relating to maternity, illness, disability, ageing, unemployment, education, HIV/ AIDS, income generation and social activities. Local savings and credit groups and community welfare funds have become an important tool for community development. They have ensured greater accessibility to funding and greater operational flexibility when compared to conventional project-based community development models. Community funds assist people to discuss, plan and implement welfare programmes according to their individual needs. They also allow people to combine their own savings with various development funds available through the government and local tambon authorities. These developments are leading to the creation of an alternative, community-driven social protection system. More than one-third of communities in the country now have their own savings groups and welfare funds. Many participate in the ‘1-baht-a-day’ system where all interested members contribute 1 baht per day to the community welfare fund. As one community leader put it, ‘This is our new security system. If this one baht a day can take care of us, isn’t that cheap?’ (ACHR, 2007). Together with other organizations, CODI has played a major role in helping local communities establish their own savings groups and welfare funds, and it has provided community networks and local authorities with seed capital to initiate these activities. Such resources unite different interests and foster participation at various levels. The funds are managed by local people, but representatives of community networks serve on CODI’s governing board and work collaboratively with its managers. Thus, CODI’s management has consistently adapted its policies and procedures to respond to changing community needs. Although CODI extended direct guidance in the early stages of the programme to help individual communities establish new savings groups, it now supports autonomous community management, promotes sharing of experiences between communities, and seeks to facilitate innovations in savings and community fund activities. Some scholars advocate these developments. For example, Decha believes that ‘culture-based welfare provisions’ as he put it are desirable, since they promote welfare pluralism in Thailand, and suggests that ‘the traditional welfare agencies at the community level such as the Buddhist temples and other mutual aid agencies should be encouraged’ to provide social security to the people (Decha, 2000, p.169). He further insists that the conventional ‘welfare state’ model in Thailand should be transformed to include the country’s traditional welfare system based on communal and collective obligations (Decha, 2008). Unlike the unilateral institution of government welfare provisions based on individual claims, a pluralistic system would combine both government and people’s contributions. The incorporation of community savings-based welfare funds into the system is desirable, since it emphasizes collective responsibility for vulnerable community members. This not only serves to revive traditional Thai culture but encourages a more empowering approach to development whereby people act as the subjects and not the objects of change. As has been shown already, this approach has been facilitated by offering opportunities for community members to initiate action.

108 Panthip Petchmark et al. However, it cannot be claimed that community savings and credit groups and welfare funds meet all local needs or that they ensure that poor villagers enjoy sustainable livelihoods. Although progress has been made on meeting the needs and priorities of communities, provisions are not yet universal and the financial viability of some funds is in doubt. Another problem is that the expansion of the ‘self-financed’ system of community-based welfare has deflected attention from the government’s responsibility to provide social security to its citizens and to adequately finance welfare provisions. This problem is exacerbated by the regressive nature of Thailand’s social protection system. The government’s social insurance schemes do not involve resource redistribution, while non-contributory social security schemes are used for those who are in government employment. On the other hand, the community fund movement has proved that the poor can contribute and share their resources once they participate fully and collectively own their communal funds. It is in this context that CODI represents a unique attempt to channel government resources to community funds and to support local community efforts to help those in need. Its activities are also noteworthy because they link community welfare efforts to governmental provisions and the services of the local tambon authorities. The community welfare funds established under this initiative may provide a viable approach to extending universal social protection to those who are currently excluded from the formal social security system. Although one cannot be too optimistic, the trend is encouraging. Indeed, the government has recently responded to requests from communities and their leaders to modify its approach to funding. It announced that a new tripartite system of financing community welfare funds comprising central government resources, local authorities’ funds and the contributions of local communities would be established and that additional budgetary resources would be allocated through CODI to boost the 3,000 existing tambon welfare funds that now cover 1.2 million people. In this way, the resources of government and the people themselves will be combined and local communities will be more effectively assisted to develop their own resources and to expand social protection to their members.

References Asian Coalition for Housing Rights (ACHR) (2007). Housing by People in Asia, no.17. Bangkok: ACHR. Decha Sungkawan (2000). ‘The Enforcement of the Social Provisions in the Contemporary Thai Social Welfare.’ In Social and Human Development in Asia and the Pacific. Tokyo: Japan College of Social Work, pp.155–171. Decha Sungkawan (2008). ‘Towards Asian Social Work Standards in Education and Practice.’ Paper presented at an International Seminar towards Asian Social Work Standards in Education and Practice, Japan College of Social Work, Tokyo. International Labour Organization (ILO), Social Security Office (SSO) and National Statistics Office (NSO) (2004). Thailand Social Security Priority and Needs Survey. Bangkok: ILO.

Community welfare funds in Thailand 109 Jutsuchon, S. (2004). ‘A Framework for Revised Official Poverty Lines for Thailand.’ Paper presented to UNDP/NESDB on Review of Thailand’s Official Poverty Line Project. Ockey, J. (1996) ‘Eviction and Changing Patterns of Leadership in Bangkok Slum Communities.’ Bulletin of Concerned Asian Scholars 28(2), 46–59. United Nations Development Programme (UNDP) (2007). Human Development Report 2007/2008. New York: UNDP. World Bank (2009). The World Development Indicators. Washington, DC: World Bank.

7

Safety net measures for Mongolian herders Coping with risks in a transition economy Mariko Okamoto

Mongolia’s transition to a market economy left its citizens vulnerable to formidable risks. One was unemployment caused by economic instability. Another was dzud, or ‘white death’: freezing winter conditions that cause large numbers of cattle deaths. Damage caused by dzud was exacerbated by the termination of communistera state-managed risk-reduction policies and cooperative societies. Political instability and depleted funds prevented the social welfare system from functioning adequately during the transitional period. People who had previously enjoyed steady employment, or avoided poverty by way of social services provided by the state, became poor. Many Mongolians could not have possibly predicted how changes in the social and economic system would impact upon their lives. Hence, the population was highly vulnerable and exposed to serious risks. Under these circumstances, the new government believed that it was important to find a variety of measures to cope with the increasing risks. Consequently, several new systems were introduced. This chapter discusses three of the new systems designed particularly for herders, namely: a renewed social protection system provided by the state; a microfinance system meant to integrate individuals facing adversity into the market economy; and an insurance system for nomadic herders susceptible to natural disasters.

Increasing poverty in a transition economy Soon after Mongolia’s democratization in 1990, the nation joined the global market as an independent economic state. This was owing to the dissolution of the Council for Mutual Economic Aid (COMECON) and suspension of the Soviet Union’s financial backing. Mongolia’s struggle to develop a market economy brought rapid change. During the transition, both urban and rural poverty increased. From the late 1990s through the early 2000s, 36 per cent of Mongolians lived below the poverty line. At this time, about 30 per cent of the urban population and 43 per cent of the rural population lived below the poverty line (International Monetary Fund, 2005). If the capital city of Ulaanbaatar and some thriving mining industrial towns are excluded from the data, poverty in the urban areas was even higher. Smaller provincial centres suffered high losses in employment opportunities leading

Safety net measures for Mongolian herders 111 to an incidence of poverty of about 42 per cent in 1995 and 45 per cent in 1998 (Japan Bank for International Cooperation, 2001). At the time, this increase in poverty was seen as transitional, unlike the persistent poverty experienced by people in South Asia and Africa. Poverty was also not confined to the economic sphere. Both secondary school attendance rates and overall adult literacy rates in Mongolia had been nearly 100 per cent before democratization but after 1990, attendance at elementary schools alone dropped temporarily to 70 per cent. However, it grew to 90 per cent in 1996 and then returned to 100 per cent in 2006 (World Bank, 2007). Infant mortality rates and life expectancy at birth also worsened for a time, but ultimately showed improvement as infant mortality dropped from seventy-six per 1,000 live births in 1992 to thirty-nine in 1999. Life expectancy increased from 63 to 67 years during the same period. The main cause of poverty in Mongolia was unemployment due to the closure of state enterprises and the transfer of their ownership to the private sector. Some 3,000 state-run corporations were restructured or privatized. In the rural areas, approximately 250 negdels, which were socialistic herding collectives, became private partnerships. The negdel had previously been at the centre of Mongolia’s collective agricultural sector and a symbol of its success. The structural adjustment programme implemented by the International Monetary Fund (IMF) required sweeping policy changes. Obliging the IMF, the government engaged in privatization, budget reduction, increases in public utility charges and administrative reforms designed to minimize the role of the state. At the same time, it reduced trade barriers and regulations in order to attract foreign investors. It was expected that once insolvent state-run companies were closed or privatized, a new wave of enterprises would proliferate. But the manufacturing industry, long accustomed to a steady supply of raw materials, machines and intermediate goods, as well as assured profits under the trade protection of COMECON, declined sharply. Before factories could operate freely, they had to secure materials required for production and also had to compete with China. Some businesses in the commercial sector did benefit from border trade but many people who had been working for government organizations or state-run companies found it very difficult to adapt to the market economy. It was also difficult for privatized companies to adjust to the new system. To make matters worse, family budgets were placed under great strain as the inflation rate jumped to 200 per cent in the early 1990s. Although it fell to just under 50 per cent in 1996, families suffered terribly. As a result, even engineers, doctors and specialized professionals were now to be found among the unemployed. Many previously economically secure families now lived below the poverty line. Since 2000, economic performance in the capital and some industrial areas has gradually improved. However, abandoned buildings once belonging to Mongolia’s state-run companies may still be seen in the provincial centres. With the exception of a few small and medium-sized companies, innovative enterprises have generally failed to materialize in these centres. In addition, the continuing drain of the population from rural areas exacerbated the poverty problem and contributed to the persistence of the economic downturn.

112 Mariko Okamoto Another cause of rural poverty at this time was the dzud which lasted from 1999 to 2002. Total livestock losses amounted to twelve million animals. Nomadic herders were left without any income and, lacking a means of livelihood, large numbers were plunged into poverty. To make matters worse, the food-processing industry in the provincial cities had been harmed by privatization and restructuring, and this contributed to a serious overall shortage of meat and milk. Many workers in these cities had begun to work in livestock herding following the lay-offs at the state-run companies, but they were among the first to suffer from the dzud. It was generally believed that herds of over a hundred animals were ideal for sustainable livestock production but after the dzud, about 37 per cent of herders owned herds of less than fifty animals (NSO, 2006). Indeed, according to the Japan Bank for International Cooperation (2001), the poorest herders owned only an average of about thirteen cows and horses and about thirty-six goats and sheep.

Statutory social protection The statutory social protection system was regarded as an accessible safety net for individual workers and farmers who were prevented from earning a sufficient income due to circumstances beyond their control. Several income protection schemes common to communist countries such as pension benefits, family allowances and free universal health care existed in Mongolia before the transition and all were provided by the government. In addition, farmers and herders were guaranteed a stable income under the negdel structure because price subsidies allowed them to sell their products at fixed prices. Furthermore, national disaster preparedness programmes offered protection from droughts and dzud. As a part of these efforts, people dug wells and student volunteers were mobilized to stock hay for cattle during the winter. Local governments and negdels also provided social services including schools, hospitals and nursing homes, which were located in provincial cities throughout the country. However, this far-reaching social security system was heavily dependent on the stable trade arrangements under COMECON and the Soviet Union’s subsidies equivalent to about 15 per cent of Mongolia’s national budget. The system was barely sustainable. These forms of external assistance came to an end in the latter half of the 1980s when Mongolia transitioned to a market economy. Because this brought about a rapid restructuring of the state-run corporations and the dissolution of the negdels, a new and effective safety net was needed. Ironically, because of these changes, the government was financially unable to meet the needs of people in poverty and in addition, the quality of social services deteriorated. In 1995, a major reform of the old social protection system was undertaken and a new system more suited to the needs of a market economy was created. The new social protection system consisted of three elements: namely, social welfare, employment assistance and social insurance. Establishing a social insurance system based on a contributory principle represented a clear shift away from the communist regime’s old social protection approach, which relied extensively on direct government funding. In addition to introducing unemployment insurance, which

Safety net measures for Mongolian herders 113 had previously been unnecessary in a centrally planned economy, independent funds were established and the government’s delivery system was significantly modified. Independent funds were created for pensions, health insurance, unemployment insurance and various allowances, and a system of compensation for job-related accidents was created. Retirees, disabled persons and bereaved families now receive monthly pensions on condition that they have paid premiums for at least twenty years. Both employers and employees each contribute 7 per cent of monthly wages to the scheme. The rate of coverage tended to decline, however, from 50.3 per cent of the employed labour force in 1995 to only 36.7 per cent in 2005. The selfemployed such as herders are also covered by the pension scheme as voluntary policy holders but the coverage remains as low as 8 per cent. Just before 1999, more than 90 per cent of Mongolia’s 2.5 million people were covered by the new health insurance system, though the coverage went down later to 76.5 per cent in 2005 (World Bank, 2009). The government subsidizes premiums for poor people who are unable to pay the full contribution rate. Unemployment benefits are paid to workers who have contributed to the scheme for more than two years at a rate of 0.5 per cent on monthly earnings. Unemployment benefits are paid depending on the length of service, ranging from 45 per cent to 70 per cent of the workers’ threemonth earnings. Since 2004, cash allowances have been paid to those living below a minimum income threshold from the social insurance fund. Approximately 6,000 needy people were covered by this programme in its first year of operation. The benefit is based on prices prevailing in different localities and on local standards of living. In the rural areas, poor herders are also entitled to assistance. Small herders owning no more than thirty-five goats and sheep or thirteen cows and horses are defined as the ‘poorest’ and qualifying for this allowance. With the transition, Mongolia’s governmental structure was also reorganized and this resulted in the establishment of the State Social Welfare Office which is the central agency responsible for social services. The Office oversees the work of thirty social service centres located around the country’s twenty-one provinces, or aimags as they are known. In addition, there are 340 social welfare offices in the country’s districts or soums. The soums were originally established to facilitate traditional nomadic herding and cover large tracts of land. Most soum centres are located dozens of kilometres away from the next, and inhabited by no more than several hundred families. This poses particular challenges for service delivery. In addition, homes for orphans, needy elderly and disabled people have also been established, and in 2004 they employed a total of 830 staff. However, the effectiveness of the new social protection system may be questioned. In 1995 when the system was introduced, only 16.4 per cent of the poorest families received social welfare allowances and most of the beneficiaries resided in Ulaanbaatar, the country’s capital city. This situation remains largely unchanged. It is believed that informal support from relatives, friends and acquaintances continues to supplement the social protection system (Japan Bank for International Cooperation, 2001). Table 7.1 provides survey results of 2003

114 Mariko Okamoto Table 7.1 Coping with risk Means of coping with risk

Number of answers

% of total answers

Cutting family expenses Support from other families (khotail*) Support from the government and relief organizations Selling livestock Loans for restocking herds and living expenses Savings Insurances Other Total

74 47 19 14 12 1 1 87 101

29.0 18.4 7.5 5.5 4.7 0.4 0.4 34.1 100

Note: Multiple answers were given. *Khotail is a group of several nomadic families that work in partnership while herding. Source: Data obtained from JBIC research on microfinance conducted in 2003 for Mongolia’s livestock and other related industries.

showing how herders in the rural areas coped with crises. Many who had begun to herd livestock after losing their jobs in the public sector had to rely on friends and relatives for assistance until they acquired new skills in herding. It appears that kinship and social networks played a major role in helping people survive the crisis of having lost their income and coping with the country’s high rate of inflation. After the dissolution of the negdels, many herders had only a little means of livelihood or support and, to make matters worse, their traditional bonds weakened. Many are still awaiting an alternative organizational mechanism that can represent their collective needs and handle negotiations with local authorities over social security and other services.

Microfinance as a tool for risk management In recent years, microfinance has played an increasingly important role in the alleviation of poverty in developing countries. It enables low-income people to gain access to financial services in a variety of ways. Microfinance incorporates poor people into a system of financial services based on small transactions and thus caters for their need for cash. Microfinance has helped many poor families who have few opportunities to find regular employment to start their own businesses or engage in other income-generating ventures. It has also contributed to the stability of small businesses and enabled those with limited incomes to save for the future. As far as risk management is concerned, microfinance delivers services promptly to people in urgent need and has proven to be effective in aiding vulnerable populations. For example, it has assisted self-employed people facing cash flow problems to overcome business risks, including economic downturns and natural disasters. Microfinance also creates many income-generating options, thereby increasing the income of poor families. This is of great significance to the most vulnerable segment of the population who have limited personal assets, savings and means to earning

Safety net measures for Mongolian herders 115 a living. Microfinance also offers credit to poor families, and allows them to manage their financial difficulties and maintain a minimum consumption level necessary for survival. Poor families confronted with personal crises, such as illness or injury, have usually turned to moneylenders to make ends meet. In response, many microfinance institutions have broadened the range of their services to transcend incomegenerating projects to include emergency loans. Microfinance has also allowed people to accumulate savings. Many people maintain savings to cope with unforeseen risks. Even those who are less involved in the cash economy, such as the nomadic families of Mongolia, need savings, and microfinance services are often their only opportunity to save. Challenges of microfinance in rural Mongolia Microfinance programmes have grown steadily since their introduction to Mongolia in the 1990s. One institution that has adopted a leading role in this development is Xac Bank, a private bank that has roots in a UNDP-funded project initiated in the late 1990s. Xac Bank was actually established by six nongovernmental organizations working closely with UNDP. In its initial stages, the project focused on training specialized staff capable of helping poor people develop microenterprises but, in just a few years, it has achieved operational sustainability and has opened thirty-two branches in aimag centres in Ulaanbaatar and throughout the country. At this time, a number of microfinance institutions were established in Mongolia. In 2001, more than 260 credit cooperatives were in operation and in 2005 about 1,600 smaller microfinance institutions had been established. The rapid expansion of these institutions may be attributed to the radical reorganization of the country’s financial system which had previously been managed exclusively by state corporations, and to the adoption of policies designed to expand the microfinance sector. Legal arrangements recognizing and regulating microfinance institutions were adopted by the government. The expansion of microfinance may also be attributed to the wider economic crisis in the late 1990s when many large banks went bankrupt because they had accumulated bad loans that could not be repaid. Nearly half of all loans disbursed by these banks have been lost. To fill the gap left by these insolvent banks, credit unions and microfinance institutions supported largely by international aid agencies responded to provide financial services to many ordinary people. However, not all of these financial institutions were necessarily concerned with poverty reduction. These microfinance institutions are largely concentrated in urban areas such as Ulaanbaatar or other relatively large aimag centres. At the soum level, more limited financial services are available largely through the country’s postal savings bank or the national agricultural bank which is now known as the Ag Bank. The services of the Ag Bank are primarily used to draw retirement pensions. The government also offers microfinance programmes to poor borrowers, but its operations are limited and its expansion into the microfinance markets has lagged. As of 2006, these programmes had reached only about 10,500 people. In particular, programmes targeted at herders had reached only fifty-eight groups with a population of 769

116 Mariko Okamoto people. Despite the government’s best intentions, it has not yet been able to provide needy people with a social safety net. On the other hand, Xac Bank is working to extend its services but it is not yet fully operational at the soum level, primarily because it is interested in establishing itself and securing sustainability as a financial institution. In fact, Xac Bank’s interest rate once exceeded 40 per cent, reflecting the effects of high inflation, limited assets and high market demand. In the future, however, the Bank hopes to serve the needy people in the rural areas. Microfinance institutions operating at the soum level in rural Mongolia face a number of challenges. As was noted earlier, the soums cover large tracts of land and are widely spread apart and inhabited by small groups of families. This poses a challenge to financial institutions planning to open local branches in the rural areas. Nevertheless, Xac Bank is committed to expanding outside Mongolia’s capital and establishing branches in outlying areas. However, to make this costeffective, the Bank is only able at this stage to make banking services available one day a month. It has also been compelled to curtail lending to groups of herders and now limits its services to individuals. Seasonal fluctuation in income among herder families poses a second major challenge for financial institutions operating at the soum level. This results in instability in the balances of account holders, making it difficult for financial institutions to maintain adequate reserves and conduct their business. Another barrier is that herders inhabit an extremely harsh natural environment. The negdel once helped herder families prepare for disasters such as the dzud and protect themselves. Now that this system has collapsed, herders are responsible for managing adversities on their own. This obviously increases the risk that they may default. Finally, the demand for capital is extremely limited in the rural areas. With the closure of the provincial industries and state-run suppliers, there are few business ventures in the rural areas today. New companies wishing to base themselves in soum centres experience a number of challenges, one of which is difficulty in securing raw materials and parts. These were previously provided exclusively by state-run processing industries which have now largely ceased to operate. Although only those manufacturers producing low value-added products seemed, to some extent, to be successful in utilizing the limited market opportunities that had become available, microfinance loans are often too small to fund more viable local industries. In general, microfinance is used more likely to serve those engaged in small retail businesses which produce high rates of return. However, local markets in Mongolia are flooded with foreign products, even at the soum level, so that there are few niche markets in the soums where microfinance products could be effective. Mongolia’s scattered rural population poses a challenge for banks and other financial institutions providing microfinance services. These institutions face similar difficulties when seeking to serve the poor. It seems desirable, therefore, that rural cooperatives within soums should enter into partnerships with banks and larger financial institutions. Banks will benefit by working with cooperatives, whose members know and trust each other. Similarly, cooperatives will benefit by securing

Safety net measures for Mongolian herders 117 financial know-how and technical assistance. Banks can reduce transaction costs as well as provide much-needed information to the cooperatives’ members. Often, businesses are unlikely to extend credit to their customers if they have little information about them. By formalizing arrangements between banks and cooperatives, their members’ credit worthiness will increase facilitating positive economic transactions in the marketplace. Cooperative arrangements of this type offer a potentially effective solution to the challenge of serving the herder community in the rural areas. Unfortunately, however, attempts at rebuilding cooperatives in Mongolia have ended in failure. One reason is the unfavourable image of the communist-era cooperatives which were run directly by the state and were often unresponsive to their members. Another problem is a lack of experience in democratic management and governance among cooperative members whose previous leaders were handpicked by the communist party. Although over 400 cooperatives were in existence in 2005, only a few have achieved growth on a scale comparable to the negdels. It is estimated that only 20 per cent of all herders in the country currently belong to cooperatives which have replaced the disbanded negdels. Many of these are small, with less than fifty members. Although the efforts to expand microfinance services to poor people in Mongolia have made some headway, much more needs to be done. In particular, microfinance institutions serving the poor need to consider the prospect of introducing microinsurance products which can help people more effectively cope with the large numbers of risks they face on a daily basis. The need is particularly great in the rural areas, where the harsh natural environment has a serious impact upon the lives and well-being of people and particularly on herders. As has been shown already, herders have suffered greatly from the economic transition, the disbanding of the negdels and the frequent episodes of dzud that plunge many into poverty and destitution. Financial institutions find it too risky to extend microfinance to herders who are so vulnerable to natural disasters. It is in this context that the country should seriously consider developing appropriate microinsurance products that can protect this community from disasters. Fortunately, as shown below, efforts are currently being made to test a livestock insurance programme to help address this problem.

Possibilities for livestock insurance in Mongolia About 200,000 Mongolian families are dependent upon livestock herding which, despite recent difficulties remains an important part of the agricultural economy. Naturally, some form of insurance is needed to help them maintain their livelihoods and prevent them from falling into poverty. However, unlike many developed countries where livestock raising is an intensive and large-scale activity managed through modern industrial techniques, it still operates extensively on a traditional basis in the country. This situation poses specific difficulties for Mongolia in designing an effective livestock insurance scheme. In Mongolia, herders own their cattle, which roam freely over large grazing areas. This makes the cost of service delivery higher and the task of identifying insured animals harder. In addition, as

118 Mariko Okamoto noted earlier, herding families in Mongolia face serious natural disasters, including dzud. The past dzud nightmare has made private insurance companies reluctant to offer insurance services to herders, while herders feel that their needs cannot be met by currently available insurance policies. There are also formidable challenges of general nature common to almost all countries in establishing an effective livestock insurance system. For insurance to be viable, providers will require that sufficient numbers of herders enrol in the programme. In addition, the more diverse the clientele, the more risks can be spread among those who are insured. Providers must guard against moral hazards such as a client failing to take reasonable preventive precautions against risk occurring, or submitting falsified claims for benefits. If insurance premiums are too highly priced, it will lead to the problem of adverse selection by which a high proportion of highrisk clients enrol to protect themselves. On the other hand, these difficulties can be overcome in Mongolia. There is an obvious market for livestock insurance since, as was pointed out earlier, about 200,000 nomadic families are engaged in herding in the country. Dzuds can indeed be devastating but they do not affect the country uniformly. A study conducted by the Japan Bank for International Cooperation (JBIC) in 2003 showed that there was a considerable degree of regional diversity in the impact of the dzud and it was clear that not all areas were seriously affected. The same study revealed that animal mortality rates differed from herd to herd, even within the same soum, and that livestock mortality was attributable to the efforts of herders to take precautions and protect their animals. This suggests that the development of appropriate and affordable insurance products that can encourage and prompt herders to take precautions is essential, even though no effective dzud forecasting systems currently exist in Mongolia. Pilot project: index-based insurance for herders Faced with the ongoing challenge of helping herding families cope with risk, the government has for some time been contemplating the introduction of livestock insurance. It has also collaborated with other agencies such as the World Bank to test different options. One option, which is currently being tested in a pilot project, is index-based insurance. This approach has been used in other parts of the world and has proved to be quite effective. It is based on the principle of establishing a particular criterion or indicator such as the amount of rainfall, the yield of crops or the mortality rate of cattle to determine when insurance should be paid. Instead of basing an insurance claim on the particular experience of individual clients, everyone who is insured automatically receives benefits when the index threshold, called the ‘trigger rate’, is reached. Thus, for example, if total rainfall in a particular area falls below the index amount, all farmers with insurance are automatically paid benefits. This is a cheaper and more effective method than inspecting each farmer’s field to determine whether their crops were in fact affected by a lack of rain. In the case of Mongolia, herders who are covered by an index insurance programme would automatically receive benefits if the dzud affected a particular area. However,

Safety net measures for Mongolian herders 119 designing an insurance programme of this kind requires that accurate records of adverse events be kept so that an appropriate index may be calculated. Fortunately, detailed records were collected by the negdels over many years, permitting the introduction of an index-based insurance programme. Mohul and Skees (2006) provide a helpful account of the index-based insurance programme being tested among Mongolian herders. The pilot project contains four components to cover losses experienced: Base Insurance Product, Disaster Response Product, Livestock Insurance Indemnity Pool and government reinsurance. Insurance companies provide the Base Insurance Product to individual herders with a fixed trigger rate determined at the soum level according to past mortality rates for particular animal species. Herders pay premiums based on the number of cattle covered. Indemnities are paid out only when the actual average mortality rate within a soum exceeds the trigger rate. Figure 7.1 shows variations in livestock mortality rates against the trigger rate over the course of a given period of ten years. Here, indemnities are paid for years two and seven. However, the monetary amount of indemnity does not cover all losses and only the difference between the average mortality rate and the trigger rate is considered in the indemnity calculations. Furthermore, an upper payments limit is established. This is referred to as the ‘exhaustion point’. In the case of dzud, the extent of the damage can surpass the capacity of the insurer to pay out and for this reason exhaustion points are needed to protect the insurance companies. For example, Figure 7.1 shows the actual mortality rate at year seven, which is the highest in ten years, and shows that it exceeds the exhaustion point. In these cases, policy holders receive payouts calculated on the difference between mortality rates at the trigger point and the exhaustion point.

Actual average rate in the soum Trigger rate Exhaution point

40

Mortality rate of Goat (%)

35 30 25 20 15 10 5 0 1

2

3

4

5

6

7

Year

Figure 7.1 Model of an insurance based on mortality Grassroots Social Security in Asia

8

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120 Mariko Okamoto However, this mechanism does not protect nomadic herders who sustain very high losses. For this reason, the government created the Disaster Response Product to provide additional compensation and act as a safety net. Moreover, to ensure that indemnity payments are not stopped when an insurance company faces financial difficulty, the pilot project established the Livestock Insurance Indemnity Pool, which allows several insurers to pool herders’ premiums. This technique is particularly important when insurers face a large-scale disaster. In cases where funds within the Livestock Insurance Indemnity Pool are still not sufficient to protect herders, the government secures a reinsurance contract with international insurance firms. It shares the cost of reinsurance with the member companies of the Livestock Insurance Indemnity Pool. The index-based insurance programme has several advantages. First, the costs of making loss assessments are reduced because the same rate of indemnity is applied to policy holders in a particular area. This eliminates the need to visit individual herders and determine their individual losses. Although the use of an index approach may appear to encourage moral hazard on the part of policy holders, it has actually had the opposite effect. It incentivizes individual herders to better protect their cattle because even herders with lower than average losses receive the same indemnity rate as everyone else. As mentioned previously, livestock losses can be reduced through adequate caretaking precautions such as storing hay, preparing winter shelters and adequately fattening animals during the summer. Another advantage is that the Base Insurance Product limits an insurer’s payment responsibility and makes insurance viable. Insurance providers now have an incentive to enter the livestock insurance market and even to expand into remote areas. An added incentive is that the government backs the Base Product with the Disaster Response Product. While this does impose additional costs on the government these are offset by the cost of providing emergency relief to those affected by the dzud. In addition, administrative costs are significantly reduced by automatically registering herders once they purchase insurance. An additional advantage is the government guarantee of the system. This encourages herders to trust the insurance system because they are assured that their claims will be met. This is particularly important since the insurance business in Mongolia practically collapsed when the country’s domestic insurance market bottomed out and many insurers failed to meet their obligations, resulting in widespread distrust of insurance. Although some commercial providers have been reluctant to join the Livestock Insurance Indemnity Pool, it is an indispensable tool for promoting livestock insurance among the country’s nomadic herders and for protecting their livelihoods.

Towards comprehensive social protection Currently, the Mongolian economy is making a favourable recovery but the country has been through a very difficult period. It has taken many years to re-establish industries once dominated by state-run corporations and for economic growth to return. As noted at the beginning of this chapter, unemployment and poverty

Safety net measures for Mongolian herders 121 increased during the transition and this was exacerbated by a lack of social services and income-protection programmes. The communist-era social security system was severely strained and in many cases it failed to protect those who had previously benefited from its generous provisions. Although privatization and economic reform has created a foundation for economic growth, the damage caused by the transition must be recognized. Structural adjustment may have been necessary for future market economy growth, but it has been a double-edged sword, causing much suffering among ordinary people. It is clear that steps should have been taken during the country’s transition to protect these people, and that greater efforts should have been made to limit the damage of drastic structural change. Despite the progress that has been made, Mongolia’s people still face many challenges. The international community should provide the country with means to ameliorate these crises. In addition to supporting sustainable economic growth, support for programmes that provide greater social protection and result in a new social welfare system will be needed. Microfinance and microinsurance have an obvious role to play in a new social welfare system of this kind. However, in a situation where people have been accustomed to benefiting from employment opportunities in state enterprises and from the generous welfare system, it takes time for individuals to take advantage of new opportunities to use microfinance. Particularly in remote rural areas where opportunities are more limited, people cannot be expected to launch microenterprises or improve their livelihoods through microfinance, unless and until a local industrial base is established in provincial centres offering diverse earning opportunities to microfinance users. Although microfinance has a role to play, more attention should be given to supporting communities that have traditionally relied on livestock herding. This requires programmes that will assist them to mitigate their vulnerability against risks and disasters and thus augment their credit worthiness to secure microfinance. Appropriate insurance products designed to protect their herds during times of adversity is therefore urgently needed and the government’s current experimentation with appropriate forms of insurance should be actively encouraged. In particular, steps should be taken to more effectively address the risk of natural disasters such as dzud. Following the breakdown of the negdels, existing cooperatives need to be strengthened and, in many cases, they need to be expanded so that they are large enough to minimize the effects of disasters. Cooperatives may also function as microfinance institutions and insurance agents, especially in the remote areas. However, to reorganize cooperatives into a more democratic structure and to strengthen their management and financial capabilities, they should be provided with more extensive technical assistance. In addition, the government should develop a nationwide infrastructure for internet services in order to reach remote areas in the country. This will facilitate adequate information networks for cooperation among insurance firms as well as microfinance and microinsurance providers. Statistics relating to various risks and insurance need to be routinely collected and greater efforts at public education should be made. Effective dzud forecasting systems are of particular importance and they will help herders to take precautions by, for example, bringing their animals

122 Mariko Okamoto off the range. The government needs to take active leadership in promoting a coherent national plan of this kind and its efforts should be supported by the international community. Nongovernmental organizations and cooperatives should participate in the process of extending microfinance and microinsurance, and promoting social protection. Their efforts should focus on assisting local community members to organize and develop the collective capacity to obtain social services that the communities need. These organizations should cooperate with the government as well and, as commercial insurance providers, protect ordinary people against the risks they face. High priority should be given to providing social protection in rural areas. As has been shown already, it is possible to extend microinsurance to protect the livelihoods of nomadic herders, even in sparsely populated areas, but a concerted effort supported by the government will be essential for its success.

References International Monetary Fund (2005). Poverty Reduction Strategy Paper, Mongolia. Washington, DC: IMF. Japan Bank for International Cooperation (2001). The Poverty Profile, Mongolia. Tokyo: JBIC. Japan International Cooperation Agency (2007). Indices for Key Country Facts. Available at http://libportal.jica.go.jp/Library/Public/Index/EastAsia-SouthwesternAsian/Mongolia.pdf. Mohul, O.and Skees, J. (2006) ‘Index-Based Livestock Insurance in Mongolia.’ Access Finance 10(March). National Statistical Office (2006). National Statistical Year Book 2006. Ulaanbaatar: NSO. World Bank (2007). World Development Indicators. Washington, DC: World Bank. World Bank (2009). ‘ Social Protection’, in Mongolia – Consolidating the Gains, Managing Booms and Busts, and Moving to Better Service Delivery : A Public Expenditure and Financial Management Review (Vol. 1 of 2). Washington, DC: WorldBank, ch.5.

8

Grassroots social security in Indonesia The role of Islamic associations Sirojudin and James Midgley

As in other countries, numerous grassroots mutual aid associations have been established in Indonesia. No reliable estimates of their numbers are available, but they are to be found all over the country in both urban and rural areas, and provide a modicum of social protection to many families. These organizations operate in parallel with the government’s formal social security system and the commercial insurance market. Unlike the formal system, grassroots mutual aid associations are usually small, have a minimum of rules and regulations, and are based on strong social networks of cooperation, reciprocity and trust. They are established, managed and governed by the people themselves, who are often members of the same extended family or clan, occupational group or local community. Perhaps the best known of Indonesia’s many different types of mutual aid associations are the rotating savings and credit societies (ROSCAs) that distribute accumulated contributions to their members in turn. Known as arisans, their activities have been well documented. In fact, research undertaken into Indonesia’s arisans in the 1950s by the American anthropologist Clifford Geertz (1956, 1962) was instrumental in informing Western social scientists about these associations whose methods of operation were then not well known. Since then, much more information about ROSCAs in different parts of the world has become available and scholarly debate about their functions has intensified. Indonesia has also been the setting for other studies into non-formal social security institutions. For example, pioneering research into non-formal social security by Franz and Keebet von BendaBeckmann (1994, 2007; von Benda-Beckmann et al., 1988) was largely informed by their experience of living and working in Indonesia. Many of the country’s mutual aid associations have evolved into more complex organizations characterized by greater formalization and links with the statutory social security system. They have also engaged with microcredit and microfinance activities. In addition, new Islamic mutual associations have emerged. Unlike the arisans which are largely secular, these associations are explicitly based on Islamic teaching. Since little information about the activities of Islamic mutual associations is available, this chapter describes the work of two associations known respectively as Lembaga Amil Zakat Infaq and Shadaqah (LAZIS) and the Baitul Mal wa-al-Tamwil. Both associations were established by local Islamic leaders and have grown steadily in recent years. They have also experienced a significant degree

124 Sirojudin and James Midgley of formalization. This chapter examines the Islamic principles on which they are based and describes their activities. It also considers their effectiveness and the challenges they face. Finally, some implications for policy are examined. First, some background about Indonesia and its statutory social security system will be provided.

Indonesia and its social security system The Republic of Indonesia is a Southeast Asian nation with a population exceeding 230 million. Its archipelago comprises more than 17,000 islands that stretch for about 3,000 miles from east to west. Indonesia is the fourth largest country in the world, and has the world’s largest Muslim population. Its capital is Jakarta which has a population of about 8.5 million. Although 85 per cent of the population is Muslim, there are Christian, Hindu and Buddhist minorities, and many tribal people living in remote areas are animists. In addition to their religious diversity, Indonesia’s people speak more than 300 different languages and have different cultural traditions. The Javanese are the largest of these cultural groups, comprising about 40 per cent of the population. Like many other large Asian countries, the territory that comprises modern-day Indonesia has in the past been ruled by different kingdoms and dynasties. Prior to the spread of Islam in the thirteenth and fourteenth centuries, these kingdoms were either Hindu or Buddhist. The Hindu Majapahit kingdom established in Java in the late thirteenth century was one of the largest, extending political control over the majority of this territory. Islam spread slowly as a result of contact with Arabic traders, and gradually became the predominant faith. However, other religious traditions were accommodated, creating a syncretic and tolerant culture. In the early 1500s, Portuguese traders sailed to Indonesia to purchase its spices which were in high demand in Europe at the time. They were soon followed by other traders, notably the Dutch, who soon monopolized the spice trade. By the mid-1600s, the Dutch East India Company had established political and military control over most of Indonesia. In the nineteenth century, following the company’s insolvency, the Dutch government formally annexed Indonesia and ruled the territory until the Japanese invasion of 1942. With the surrender of the Japanese at the end of the Second World War, Indonesian nationalists declared unilateral independence which was formally recognized by the Dutch government in 1949. During the Dutch colonial period, Christianity spread through the work of missionaries but, as was noted earlier, Islam remains the country’s dominant religion. Hinduism is today largely confined to the island of Bali while Buddhism and Confucianism are practised among the country’s Chinese minority. Under President Sukarno, Indonesia’s first independence leader, the country forged strong international alliances and was a key member of the Nonaligned Movement. At home, the government significantly expanded its influence by, for example, adopting centralized economic planning, introducing land reform and nationalizing foreign-owned industries. It also sought to balance rivalries between different religious, ethnic and political factions. However, economic growth was

Islamic associations in Indonesia 125 sluggish and the poverty rate remained high. In the mid-1960s, political and ethnic tensions increased as the Communist Party of Indonesia (PKI) exerted increasing influence over the president. In 1966, an aborted military coup, organized allegedly by the Communist Party, resulted in widespread violence. A counter-coup led by General Suharto restored order and also ousted President Sukarno. General Suharto then became president. Proclaiming a ‘New Order’, the Suharto government adopted more liberal economic policies in the hope of promoting rapid economic growth. Although the New Order government was autocratic, economic conditions improved steadily. The economy grew at an annual average rate of 7.5 per cent between 1966 and 1997, and the poverty rate fell from about 70 per cent to about 25 per cent during this period. However, the Asian financial crisis of 1997 dealt a severe blow to the country’s economy, and also contributed to political upheavals which resulted in President Suharto’s resignation in 1998. Since then, Indonesia has been a multiparty democracy enjoying enhanced social and political freedom (Freedom House, 2007). After President Suharto’s resignation, three presidents have been elected of whom the current president, Susilo Bambang Yudhoyono, is now in his second term. The Yudhoyono government continues to pursue liberal economic development policies and has maintained the country’s pluralistic political and cultural system. Although challenged by religious fundamentalism and terrorism, the government’s policy of religious tolerance has prevailed. Despite significant economic growth and improved social conditions, poverty remains a major concern. From 1997 to 2007, the poverty rate declined from about 24 per cent to about 16.5 per cent but the absolute number of people living in poverty remains high. In the rural areas, about 24 million people are in poverty while in the urban areas the figure is about 13.5 million. Poor people face numerous adversities and risks. Most work in the informal sector or as landless labourers or small farmers, and most struggle to meet their subsistence needs. In 2007, almost 70 per cent of the labour force (67.8 million people) worked in the informal economy (Indonesia, Central Bureau of Statistics, 2007). It is in this context that the contribution of social security to poverty alleviation should be considered. However, as in many other developing countries, the formal social security system caters primarily for those in regular wage employment and has not had a significant impact upon poverty.

The formal social security system Prior to the Dutch colonial period, Indonesians relied on family members, community networks, mosques and temples and other non-formal institutions for support in times of economic difficulty. Needy Indonesian Muslims also utilized Islamic welfare institutions such as zakat which, as will be shown later in this chapter, is mandated by Islamic teaching. Modern forms of social security based on Western practices first emerged during the colonial period when the authorities introduced a limited social assistance scheme for the urban destitute and made retirement provisions for its own administrators. Commercial firms also introduced

126 Sirojudin and James Midgley retirement provisions based on the provident fund model. In terms of this model, employees pay regular contributions into dedicated accounts, and their accumulations are then paid out plus accrued interest at the time of retirement. Accumulations are also paid out in the event of permanent disability or death. Although many employers manage their own funds, others are managed under contract with larger commercial insurance or pension firms that also offer life insurance coverage. In addition to these funds, some occupational groups formed their own contributory funds based on mutual insurance principles. One of the oldest is the Boemipoetra mutual fund established in 1912 by school teachers in the Central Java Province and which still operates today. In the post-independence period, the government introduced legislation to regulate occupational pension funds. It also consolidated retirement and medical care provisions for civil servants and members of the armed forces. A Presidential Decree of 1997 set a pension fund contribution rate for civil servants and military personnel at 3.5 per cent of their salary. This fund pays a lump sum benefit as well as a regular pension up to 70 per cent of the recipient’s final salary at the time of retirement or death. A medical programme was also introduced and is funded by a contribution of 1 per cent of salary. Several government organizations were created to administer these programmes. In 1997, the government enacted legislation that established a mandatory provident fund for employees of private firms with more than ten workers or a monthly payroll of more than one million rupiah. Employment injury or death was also covered. The provident fund requires an employee contribution of 2 per cent which is matched by employers at a rate of 3.7 per cent. The fund pays a lump sum benefit at the time of retirement. The programme was administered by a government agency known as Astek, but in 1992 its name was changed to Jamsostek. Currently, Jamsostek manages the provident fund, a work injury programme as well as life insurance and medical insurance schemes. As a result of steady economic growth, the proportion of the labour force in regular employment has increased, but, as noted earlier, it is still dwarfed by the numbers who work in agriculture and the urban informal sector. By 2006, 7.6 million workers (or about 8 per cent of the labour force) were covered by Jamsostek. In addition, approximately 500,000 military personnel and police officers and between 4.5 million and 5 million civil servants are covered by the government’s programme. Nevertheless, the vast majority of the population is not protected by the formal statutory social security system. The government has for several years been planning a major overhaul of the social security system, and in terms of a statute enacted in 2004, it intends to combine the separate programmes for the military and civil servants with that of Jamsostek to create a new, unified national social security system. This system will be overseen by a National Social Security Council (Dewan Jaminan Sosial Nasional) and administered by a new governmental body known as the National Social Security Provider Agency (Badan Penyelenggara Jaminan Sosial). The new system is currently being implemented. Although it will consolidate existing programmes and standardize the collection of contributions, record keeping and payments or benefits,

Islamic associations in Indonesia 127 it will still only cover workers in regular wage employment. The issue of how to extend social security coverage to those in the informal sector has been raised by some social security scholars, but no comprehensive proposals for achieving this goal have yet been formulated. Nevertheless, the government has taken initial steps to support and facilitate the expansion of grassroots mutual aid associations. As was noted earlier, some of these are based explicitly on Islamic principles.

Islamic grassroots social security associations Since the majority of Indonesians are Muslims, Islamic concepts and practices related to social welfare make a major contribution to the well-being of the country’s people. Millions of Muslims regularly give and receive social welfare assistance mandated by Islamic religious teaching. These practices reflect Islam’s fundamental injunction to show compassion to those in need. Zakat is at the core of Islamic welfare teaching and provides clear prescriptions for charitable giving. Zakat also has deeper meaning: it purifies wealth, promotes altruism and social solidarity, and forms the basis of a just social and economic system. Muslims also view zakat as a form of worship. Zakat takes the form of annual payments to various designated beneficiaries known as mustahik. These include people in debt, religious scholars, travellers and prospective converts among others. However, zakat is primarily given to the poor. There are two types of zakat. The first is zakat al-fitr which is paid at the end of the month of Ramadan when all Muslims are required to fast during daylight hours. Zakat al-fitr is given to help poor families celebrate the eid-al-fitr festival which marks the end of the fast. Usually, benefits consist of rice or grain. The second type is zakat-al-mal (or zakat on wealth) which is a self-assessed levy of 2.5 per cent on the value of household assets such as savings, gold, jewellery and other goods. Agricultural land is exempt but stored crops are included. Those with assets of less than a specified amount, known as nisab, are not expected to pay zakat. The levy is distributed to the designated beneficiaries mentioned earlier and is usually given directly by benefactors to recipients, but it may also be distributed through local imams, mosques or charitable organizations. While giving zakat is based on a religiously mandated annual cycle, other forms of charitable giving such as sadaqah and infaq may be given at any time. Sadaqah is voluntary and discretionary, and is given to anyone deemed by the donor to be in need. It varies in value according to the donor’s conscience and ability. Infaq is similar to sadaqah except that it is given to family members and relatives. Islamic teaching also encourages prosperous families to make endowments or waaf to establish hospitals, schools, orphanages, mosques and other institutions. Often, these endowments are supplemented by contributions from other members of the community to help meet the administrative costs of operating these institutions. These practices all express in tangible terms Islam’s wider mandate requiring believers to care for others, live in peace and show compassion. As in the other world religions, Islamic teaching is constantly evolving and new interpretations and practices compatible with its basic beliefs have emerged over

128 Sirojudin and James Midgley the years. In Indonesia, with its pluralistic traditions, a variety of interpretations dealing with diverse aspects of Islamic belief have given rise to innovations of relevance to social welfare policy. One of these is the creation of mutual aid associations based on Islamic welfare principles. New grassroots income protection institutions such as the Lembaga Amil Zakat Infaq Shadaqah (LAZIS) and the Baitul Mal wa-al-Tamwil, both of which were mentioned earlier, have emerged in the context of efforts by some Muslim leaders to formalize the zakat system. The formalization of zakat Although many Muslims believe that the assessment and distribution of zakat is a private matter governed by individual conscience and personal decisions, others contend that zakat should be collected and distributed in a more formal way by, for example, mosques and other Islamic organizations. The practice of distributing zakat through intermediary agencies such as mosques or Islamic charitable organizations has formed the basis for vigorous debate in recent years about the formalization of zakat. These debates have not only taken place in Indonesia but throughout the Muslim world. Some advocates of the formalization of zakat go further and propose that the governments of Muslim countries should enact laws requiring the formal collection and distribution of zakat. Some also take the view that these functions should be entirely taken over by the government. These argument are based on a beit-ul-mal or public treasury which was established by the Caliph Umar in the sixth century. Although this beit-ul-mal also collected taxes for public purposes, citizens were required to deposit their zakat contributions into the treasury which distributed the accumulated funds to those in need. Today, proposals to formalize zakat are vigorously advocated by Islamicist factions who believe that countries with Muslim majorities should be strictly governed by sharia law. However, many Muslim scholars are opposed to the formal collection and distribution of zakat, arguing that it was never intended to be a statutory responsibility, but an expression of individual piety. In fact, subsequent Caliphs discontinued the practice and it was not reinstated by the Ottoman Sultans. Opposition to the formalization of zakat is particularly strong among Shia Muslims. Nevertheless, the governments of several predominantly Muslim countries have enacted statutes that, to varying degrees, have fostered the formalization of zakat. In 1976, the government of Saudi Arabia passed legislation requiring that half of zakat payments be made to the government to partially fund its social assistance scheme which had been created some years earlier. The other half is distributed privately. In Pakistan, the military government of General Zia ul-Haq enacted legislation in the 1980s requiring the formalization of zakat. In Malaysia, the Religious Affairs Departments of the state governments are permitted to receive zakat payments which are then distributed to those in need. However, payments are entirely voluntary and are not intended to replace the practice of individual giving. In Indonesia, proposals for the creation of a statutory system of zakat administration were first promulgated by some Islamic leaders during the Dutch colonial

Islamic associations in Indonesia 129 period but were rejected by the government. After independence, some Islamic parties in the Indonesian Parliament campaigned for statutory regulation, and some proposed that the country’s constitution be amended to recognize zakat as a primary social welfare institution. These proposals were again rejected and it was only after the fall of the Suharto government when the law on zakat administration was passed. This statute, which was enacted in 1999, recognizes the role of zakat as a way of financing the social services and expanding welfare provision. It also authorizes the collection and distribution of zakat payments by two types of organizations. The first is a governmental organization known as Badan Amil Zakat Ifaq Shadaqah (BAZIS). This term can be translated as the Council on Zakat Administration. The second is a non-profit organization, the Lembaga Amil Zakat Infaq and Shadaqah, (LAZIS) which was mentioned earlier in this chapter. Together with the Baitul Mal wa-al-Tamwil, also mentioned earlier, the LAZIS currently provides a variety of welfare services at the grassroots level. The 1999 statute provides that BAZIS may be created by the provincial or county governments. Although they are supervised by Islamic scholars, teachers and leaders, their day-to-day activities are managed by civil servants. As governmental organizations, they are also accountable to the provincial governors and county administrators. The BAZIS are based on an earlier model introduced by the governor of Jakarta Province in the 1970s, despite opposition from the central government. Today, BAZIS have been established in twenty-seven of the country’s provinces and in 375 counties. Some large provinces have more than one BAZIS and, in addition, their activities are regulated by a national body. Like the BAZIS, the LAZIS are also authorized by the legislation to collect and distribute zakat funds but they are independent and manage their own programmes. The LAZIS Instead of distributing zakat contributions to needy people on behalf of donors, most LAZIS use these contributions to finance their own activities which include a variety of social services and educational and developmental programmes. The LAZIS model is based on older Islamic charities or foundations and particularly the Al-Falah Social Foundation, which was established in Surabaya in Java Province in 1987. To be recognized as LAZIS, Islamic charities and foundations must formally register with the government. However, they retain their non-profit status, are usually based in the local community and function as grassroots welfare institutions. The LAZIS are at an early stage of development and currently, only about thirty Islamic non-profit organizations have been given LAZIS status by the government. In theological terms, the LAZIS are committed to transforming the mustahiks (those who are entitled to receive zakat funds) to become muzakkis (those who are obligated to pay zakat). This principle drives the emphasis in many LAZIS on programmes that promote self-sufficiency and independent living. Like other non-profit organizations, they have governing boards or committees, and religious teachers and leaders are usually well represented. Some LAZIS are affiliated

130 Sirojudin and James Midgley with mosques or larger Islamic organizations and some have strong links with Islamic political parties such as the Justice Party (Partai Keadilan). In fact, one LAZIS was established by party activists during the recession of the late 1990s to provide emergency relief. Another important LAZIS, the Dompet Dhuafa Republika, was founded by the managers and employers of a national newspaper, the Republik. Although LAZIS provide a variety of social, educational and developmental services, their commitment to promoting self-sufficiency transcends the ‘charity’ approach of many non-profit organizations. Many LAZIS administer educational programmes such as schools and adult education classes, and many have also established scholarship funds to help poor families meet the costs of educating their children. Some even provide scholarships for university education. The Al-Falah Foundation mentioned earlier has a special programme to train school teachers. These human capital programmes seek to prepare the next generation to participate effectively in the productive economy and realize their potential. As such, the LAZIS’s educational programmes are consistent with Islamic teaching. Several LAZIS operate microcredit and microenterprise programmes and, in addition to making low-interest loans, they provide technical assistance to those seeking to establish small businesses. Several serve poor urban communities but others operate in rural areas, providing credit and technical support to small farmers. One LAZIS has pioneered a programme which links small family businesses with larger, well-established enterprises permitting the exchange of information and technical expertise. Many have established savings associations and some have introduced matched accounts that subsidize the savings of poor families. Like other mutual aid associations in Indonesia, these savings programmes help families accumulate assets that may be used to meet unexpected contingencies. Many LAZIS also provide emergency services to families displaced by natural and other disasters. Families living in urban slums are often the victims of fires which completely destroy their homes. Some also provide health services such as clinics and mobile services to underserved communities. One of the larger LAZIS has its own hospital which also provides outpatient clinic services. The hospital caters primarily for poor families. Its medical services are also utilized during times of natural disasters. Although the LAZIS are expanding, and obviously provide important services, they have not been able to attract zakat contributions from the public on a significant scale. A survey undertaken in 2004 by the Center for Language and Culture (2004) reveals that about 51 per cent of Indonesia’s Muslims donated their zakat payment to local mosques which then distributed the funds to those in need. Another 45 per cent gave their zakat payments directly to needy relatives or to poor families living in their neighbourhoods. The survey found that very few were interested in donating their zakat contribution to the Councils on Zakat Administration (BAZIS) which are generally viewed as governmental organizations. Although there was more sympathy for the non-profit LAZIS, their activities were not well understood. Only a small proportion of those interviewed reported having given their zakat contribution to a LAZIS. If these organizations are to gain greater public support, more vigorous public information campaigns to advertise their work will be needed.

Islamic associations in Indonesia 131 However, since current giving preferences are well established, it is not certain whether the LAZIS will attract widespread financial support and it is likely that they will continue to rely on gifts from wealthy donors, foundations and business corporations. The Baitul Mal wa al-Tamwil The term Baitul Mal wa al-Tamwil can be literally translated as a ‘house of assets and microenterprises’. The similarity of these organizations to the Beit-ul-mal established by Caliph Umar will be apparent but they do not rely on zakat contributions for their operations. Nor, like the LAZIS, are they authorized by the 1999 zakat administration statute to collect and distribute zakat funds. Instead, as microcredit organizations, they obtain their seed funding from local community members and, of course, from loan repayments which are then circulated to new enterprises. The idea for the Baitul Mal wa al-Tamwil came from the Indonesian Association of Muslim Scholars which wished to emulate the Grameen Bank in Bangladesh and promote local cooperative microenterprises. To achieve this goal, the association created a national organization in 1995 known as the Center for the Development of Microenterprises (Pusat Inkubasi Bisnis dan Usaha Kecil (Pinbuk)). Funds to support this initiative were obtained from the Indonesian Islamic Bank (Bank Muamalat Inonesia) as well as private and corporate donors. Pinbuk is charged by the Association of Muslim Scholars with strategic planning and facilitating the creation of local Baitul Mal wa al-Tamwil microcredit cooperatives throughout the country. Its staff members are mostly volunteers but they are trained to assist local communities wishing to establish their own associations. Typically, when a local community expresses interest in establishing a Baitul Mal wa al-Tamwil, a Pinbuk staffer or volunteer meets with community members and provides guidance and technical support. Pinbuk requires that a cooperative with a minimum of twenty members be created. It encourages a diverse membership comprising not only local leaders but representatives from the youth and lowincome families. It also requires that women participate fully. The cooperative’s members are required to raise capital of about US$1,600 which is deposited in a joint account. This capital is then used to launch local microenterprises. Generally, local Baitul Mal wa al-Tamwil cooperatives set up small enterprises established by their own members. Low-interest loans are provided and a loan payment schedule is negotiated. Pinbuk staff or volunteers provide advice and support to the new enterprise which may also be mentored by successful enterprises previously created by the cooperative. Since the programme’s inception in the early 1990s, the number of Baitul Mal wa al-Tamwil has increased rapidly and by 2008 about 3,700 local microcredit cooperatives had been launched. In addition to Pinbuk, a national association of local cooperatives has recently been established and it currently has about 600 member associations. The Indonesian Islamic Bank continues to support the programme on a limited basis but, like Pinbuk itself, does not fund local businesses.

132 Sirojudin and James Midgley It is estimated that the total funds currently in circulation among the country’s Baitul Mal wa al-Tamwil exceed US$210 million. The Baitul Mal wa al-Tamwil adhere strictly to Islamic teaching. Instead of receiving interest, which is forbidden, a profit-sharing loan repayment mechanism is utilized. The Baitul Mal wa al-Tamwil also require that members’ business practices are ethical and that members comply with a code of conduct which promotes solidarity, trust and cooperation. As with the LAZIS, the Baitul Mal wa al-Tamwil are committed to poverty alleviation through an investment rather than a charity approach. Their members believe that microenterprise development helps poor families acquire the business acumen and skills that will help them to be successful and financially independent. Although the local Baitul Mal wa al-Tamwil are primarily engaged in microcredit and microenterprise, they also have a well-defined social security function. In addition to providing the initial seed capital to fund local microenterprises, each member is required to contribute regularly to a social welfare fund which can be accessed if and when they experience financial need. This fund is managed by a local Baitul Mal wa al-Tamwil and assistance is usually provided in the form of loans. However, members needing help are first required to approach their relatives and friends or other members of the cooperative. Members usually seek help when they become ill and unable to work, or when they lose their homes or business premises through fire, floods or other contingencies. Frequently, the widows and children of deceased members also request assistance but, in these cases, assistance is provided for a limited time and the Baitul Mal wa al-Tamwil seeks long-term assistance on their behalf from other sources. In addition to responding to emergencies, the social welfare funds also provide scholarships to help members meet the cost of educating their children. The Baitul Mal wa al-Tamwil have also been quite successful in establishing links with government agencies. In 2005, with the support of Pinbuk, several Baitul Mal wa al-Tamwil participated in a programme for recipients of government social assistance benefits. This programme provided financial education and business development skills in the hope that participants would be prepared for prospective membership in local cooperatives. They also helped establish their own savings accounts managed by local Baitul Mal wa al-Tamwil. About 750 poor families participated in this programme, and some have joined their local cooperative and established their own businesses. The government’s Department of Public Housing has also worked closely with Pinbuk, and several Baitul Mal wa al-Tamwil were selected to participate in a programme which provided assistance to members seeking to purchase their own homes. Members are selected for their credit worthiness and their loans are subsidized by the Department. Although the rapid growth of the Baitul Mal wa al-Tamwil is indicative of the programme’s success, several challenges still have to be met. Not all the cooperatives have been successful and despite generally high loan repayment rates, a significant number of enterprises fail. Although most members remain loyal and active, some have dropped out and defaulted on their commitments. Another problem is the difficulty in raising funds in poor communities. As was noted earlier,

Islamic associations in Indonesia 133 Pinbuk relies on local capital provided by cooperative members to launch small businesses but many poor communities cannot generate sufficient resources to meet demand. In addition, the local Baitul Mal wa al-Tamwil have to compete with other sources of credit including local moneylenders and banks. A major challenge to Pinbuk is to secure additional investment funds. Although it has in the past used the resources of the Indonesian Islamic Bank, primarily for operational purposes, a more substantive arrangement by which local Baitul Mal wa al-Tamwil can have better access to funding is urgently needed.

Policy implications Grassroots social security institutions operate all over the world today, providing a degree of income protection to millions of people. Although only a few social security scholars have studied their activities, they have now attracted wider attention and more information about their contribution is available. As noted at the beginning of this chapter, the activities of mutual aid associations in Indonesia, and particularly of rotating savings and credit associations, have been well documented. This research has been augmented by a growing number of studies in other parts of the world. The work of these grassroots associations, their membership, goals, scope and the challenges they face are now being systematically researched. This research has revealed many commonalities among mutual aid associations in different parts of the world, showing that most are small, generate limited resources, and are best suited to dealing with temporary contingencies such as illness or the loss of business assets or livestock. They also provide funds for events such as funerals, weddings or other ceremonies. However, research into grassroots social security in the developing world has not paid much attention to the contribution of Islamic institutions. Studies have focused largely on secular associations based on family, kin or community networks or on similar occupational activities, particularly among women. Because there are between 1.3 and 1.5 billion Muslims in the world today, and a significant number of African and Asian countries have populations that are overwhelmingly Muslim, it is appropriate that research into Islamic grassroots social security associations be undertaken and that their relevance for policy be considered. There is a growing recognition that non-formal social security institutions have a role to play in promoting what the International Labour Office (Reynaud, 2002) calls ‘social security for all’. It is well known that formal social security programmes cover only a small proportion of the population, and ways of extending coverage are being discussed. It is widely agreed that governments should support non-formal social security institutions and that they should be more effectively linked or integrated with the formal, statutory system. This is not a new proposal, having been raised by social security scholars for many years (Getubig, 1992; Gilbert, 1976; Midgley, 1984, 1994). The previously popular view that modern forms of social security such as social insurance are best suited to industrial societies while non-formal systems cater effectively for the needs of agrarian communities is no longer accepted. There is general agreement that ways of meeting the pressing

134 Sirojudin and James Midgley material needs of the world’s poor through a comprehensive approach to social security must be found. Although non-formal social security institutions such as mutual aid associations can make a contribution to extending social protection, they have numerous limitations. The sums of money collected by these groups are generally small and the benefits they pay are limited. Only a small proportion of families in low-income communities are members of these associations, leaving the majority without protection. Although their members are often loyal and enthusiastic, they often have to deal with internal conflicts and disputes and, on occasions, their funds have been poorly managed and even squandered. Although their informality and networks of reciprocity and trust are a major strength, a lack of regulations and record-keeping impede their effectiveness. For this reason, some scholars believe that the formalization of grassroots mutual associations should be encouraged. Of course, this can have a dampening effect and it is important that policies of this kind have the support of the members of these associations. However, the evolution of mutual aid into more formal schemes, such as those discussed in this chapter, can bring many benefits. Government should also promote formalization by strengthening non-formal social security activities through, for example, providing technical assistance, training and resources. In addition, the rules governing the membership of statutory schemes should be modified to extend social security coverage to informal sector workers. So far, the Indonesian government has only taken preliminary steps to officially recognize and support the non-formal social security sector. The debates about the overhaul of the country’s formal social security system that took place a few years ago paid little attention to the role of the non-formal system, even though several social security scholars urged the government to address the issue. Nevertheless, the government is aware of the potential of the non-formal sector and the enactment of the 1999 statute on zakat administration recognized its role. As noted earlier, the government has also funded projects that utilize Islamic associations for training and microenterprise development. However, a much more systematic and comprehensive approach will be needed if the informal sector is to be harnessed to extend income protection to all of Indonesia’s people.

References Center for Language and Culture (2004). Islamic Philanthropy and Social Justice. Jakarta: State Islamic University Freedom House (2007). Freedom in the World 2007. Washington, DC. Geertz, C. (1956). The Rotating Credit Association: An Instrument for Development. Cambridge, MA: Massachusetts Institute of Technology, Center for International Studies. Geertz, C. (1962). ‘The Rotating Credit Association: A “Middle-rung” in Development.’ Economic Development and Cultural Change 10(3), 241–263. Getubig, I.P. (1992). ‘Non-Conventional Forms of Social Security Protection for the Poor in Asia’, in I.P. Getubig and S. Schmidt (eds), Rethinking Social Security: Reaching Out to the Poor. Kuala Lumpur: Asian and Pacific Development Centre. pp. 106–135.

Islamic associations in Indonesia 135 Gilbert, N. (1976). ‘Alternative Forms of Social Protection for Developing Countries.’ Social Security Review 50(4): 363–387. Indonesia, Central Bureau of Statistics (2007). Poverty and Workforce Statistics. Jakarta. Midgley, J. (1984). Social Security, Inequality and the Third World. Chichester: John Wiley & Sons. Midgley, J. (1994). ‘Social Security Policy in Developing Countries: Integrating State and Traditional Systems.’ Focaal 22/23(1), 219–230. Reynaud, E. (2002). The Extension of Social Security Coverage: The Approach of the International Labour Office. Geneva: ILO. von Benda-Beckmann, F. and von Benda Beckmann, K. (1994). ‘Coping with Insecurity.’ Focaal 22/23(1), 7–31. von Benda-Beckmann, F. and von Benda-Beckmann, K. (2007). Social Security Between Past and Future: Ambonese Networks of Care and Support. Berlin: Lit Verlag. von Benda-Beckmann, F., von Benda-Beckmann, K., Casino, E., Hirtz, F., Woodman, G.R. and Zacher, H.F. (eds) (1988). Between Kinship and the State: Social Security and Law in Developing Countries. Dordrecht: Foris Publications.

Part III

Policy implications

9

Conclusion Mutual aid, microinsurance and social security for all Mitsuhiko Hosaka and James Midgley

It was argued in the Introduction of this book that government social security schemes should provide coverage and adequate social protection for all. However, achieving this goal is a major challenge and the fiscal, administrative and economic difficulties of simply including hundreds of millions of poor farmers, agricultural labourers and urban informal sector workers in statutory schemes is generally recognized. On the other hand, there is widespread support for the view that social security coverage should be extended to cover the excluded majority. As noted earlier in this book, the International Labour Organization (ILO) campaign to provide social security for all is gathering pace. It has been endorsed by other international bodies, academics, nongovernmental organizations and many governments. Numerous proposals for extending coverage have been formulated. The most obvious is that existing social insurance schemes be modified to protect larger numbers of workers and particularly informal sector workers. Similarly, it is argued that social assistance should be more readily available to poor people, and noncontributory retirement pensions and family allowances should be more widely established. Another proposal is that non-traditional income maintenance programmes such as food for work schemes be reformulated and expanded. It has also been proposed that innovative programmes such as matched savings accounts and conditional cash transfers be introduced or more vigorously promoted. Yet another proposal, which is strongly endorsed by this book, is that the activities of grassroots mutual aid associations and microinsurance providers should be supported, linked and ultimately integrated with the statutory social security system. The book’s case studies on India, Indonesia, Mongolia, the Philippines, Sri Lanka and Thailand show that the government’s social protection schemes, cash transfers and social assistance programmes often fail to serve the neediest groups. Various reasons for this state of affairs have been identified, such as weak administrative capacity, poor targeting, and even vested interests that distort their effectiveness. While there is room for improvement in the government’s service delivery system, mutual aid groups are more likely to respond to people’s needs. However, to achieve more effective grassroots responses, many scholars working in the social protection field believe that informal mutual aid associations should undergo a degree of formalization and that the transformation of informal mutual aid into microinsurance should be actively promoted.

140 Mitsuhiko Hosaka and James Midgley The editors and contributors to this book are of the opinion that all of these approaches have a role to play in formulating a coherent policy designed to provide social security for all. The book’s case studies show that nongovernmental organizations, including microfinance institutions and community-based groups, can provide microinsurance services at an affordable price to the poor. Their efforts deserve to be supported by national governments as well as by international organizations and the governments of donor countries. The book hopes to make a modest contribution to the goal of providing social security for all by discussing ways in which the activities of grassroots mutual aid associations can be enhanced through microinsurance.

Promoting microinsurance Recognizing the potential as well as the limitations of mutual aid associations, pragmatic policy interventions that enhance their effectiveness can be developed. As argued in the Introduction to this book, mutual aid associations can enhance their income protection role if they are actively supported by governments and other agencies. This will invariably involve formalization and organizational sponsorship. As noted earlier, both are defining features of microinsurance. Ultimately, increasing the effectiveness of mutual aid requires a transition from a spontaneous and loosely organized activity to microinsurance. It also requires that loosely formed groups be incorporated as structured organizations. The case studies in this book reveal that many informal mutual aid groups have already adopted policies and procedures that facilitate this transition, such as establishing bank accounts, obtaining legal recognition and securing institutional support. Some will challenge the view that mutual aid associations should evolve into formal microinsurance providers. They believe that the spontaneity and participatory character of grassroots mutual aid is a major strength and that external efforts to promote mutual aid activities are likely to be counterproductive. Instead of addressing local needs, grassroots mutual aid will be stifled by this type of intervention. Critics claim that this is especially likely if governments are involved. Intervention by government agencies, they argue, inevitably results in the adoption of bureaucratic rules and procedures that impede local cooperative efforts. It also involves regulatory control by indifferent and incompetent officials resulting in the suffocation of mutual aid. Although many social policy scholars are sympathetic to the view that government involvement and that of other external organizations will have a dampening effect on the efforts of local people to respond to need, they believe it is possible to find a balance that encourages local effort by providing various external supports. However, many recognize that poor people will continue to utilize informal income protection mechanisms even if governments and other agencies foster formalization. For this reason, they urge that formalization should not involve the imposition of heavy-handed regulations and controls by the state but instead create a supportive policy environment and provide incentives and opportunities in the form of legal recognition, financial assistance, training, sharing of experiences and access to

Conclusion 141 resources. A facilitative approach of this kind, as demonstrated by the role of Thailand’s CODI in Chapter 6, is more likely to strengthen mutual aid than the use of regulatory directives. The case studies of Sri Lanka and Thailand in this book provide insights into the processes through which innovative schemes are conceived, initiated and managed by community members. They attest to the importance of providing opportunities for mutual learning and garnering experience. With a pooled fund of their own, savings groups in these countries meet regularly and convivially. These meetings gave rise to new social protection schemes including life insurance, pension programmes, medical support and other community-based social security measures. These programmes did not develop from a blueprint that directed members but from expanded opportunities for self-management. This facilitative approach provides a framework, space and opportunities for local people to work together, while remaining sufficiently flexible in response to changing needs. A unique feature of CODI is its ability to adjust its own administrative framework and strategies as local community funds evolve. Efforts to enhance the effectiveness of mutual aid should be viewed as a partnership involving a concerted effort by multiple agencies committed to providing income protection to the population as a whole. Existing grassroots mutual associations are at the centre of this partnership and should be fully involved in the policy-making process. Other partners are national and local governments, nongovernmental and microfinance organizations, official international development bodies, international nongovernmental aid organizations, international donors and commercial insurance providers. Nongovernmental organizations in many countries have already introduced microinsurance programmes and their experience will be a major resource. International bodies such as the International Labour Organization have also launched microinsurance initiatives and can play an important role in supporting national policy developments. Financial aid and credit from the World Bank and the regional development banks to fund national innovations will be crucially important. As was shown in the Mongolian case study, international agencies can also take the lead in initiating innovative pilot projects. Well-endowed international foundations can also contribute to this task. It was noted in the book that the Bill and Melinda Gates Foundation, working with the ILO, has funded a number of microinsurance demonstration projects in the developing world. Similarly, commercial insurance firms are expanding their operations and some have already formed partnerships with nongovernmental organizations to provide insurance products to poor communities. In many countries, the government will play a leading role in promoting the expansion in microinsurance and it should use its authority to foster policies that strengthen mutual aid, promote microinsurance and link these initiatives to the statutory social security system. An important first step is the creation of a specialized government agency that can be a focal point for coordinating the work of different stakeholders and for integrating mutual aid and microinsurance with the statutory social security system. It should also be charged with leading national efforts to redesign the social security system to cover the population as a whole.

142 Mitsuhiko Hosaka and James Midgley It is important, therefore, that an agency of this kind be located within the government ministry or department responsible for the management of the national social security system. However, to be successful, this agency needs to develop strong collaborative relationships with mutual aid and microinsurance associations as well as nongovernmental and commercial providers. Since many governments lack expertise in microinsurance, as well as financial resources, the contributions of international donor governments, official international bodies, international nongovernmental aid organizations and universities and research organizations should be elicited. The expertise of well-established nongovernmental and microfinance organizations should also be utilized. Governments should also collaborate with commercial insurance firms and their trade representatives to foster cooperation with microinsurance providers. Regional and national representative organizations of microinsurance providers should be created and it is also desirable that advisory bodies comprising the leaders and members of grassroots mutual aid associations and microinsurance organizations be established. A step towards this goal was taken by CODI in Thailand which, as was shown in Chapter 6, is an autonomous public entity. Grassroots groups engaged in microinsurance and community welfare are represented at the local, regional and national levels and provide guidance and suggestions to CODI’s management. Similarly, as shown in Chapter 5, the Women’s Co-op in Sri Lanka has created a federated organization which represents local groups and branches. In addition to forging a partnership between multiple agencies concerned with mutual aid and microinsurance, governments need to formulate comprehensive national plans for coherently addressing the problem of limited social security coverage. These plans should address all aspects of social protection including mutual aid and microinsurance. Plans should be formulated in partnership with all relevant stakeholders including nongovernmental, commercial and international organizations as well as mutual aid and microinsurance providers. Few countries have any policies for extending income protection to the excluded majority and, where they exist, national efforts to expand coverage are often fragmented and haphazard. Another problem is a lack of coordination between different agencies. Social security policies and programmes are often developed in isolation from the efforts of nongovernmental organizations to introduce microinsurance. Similarly, local and international nongovernmental organizations often proceed without involving governments except in a perfunctory way or otherwise by merely securing official approval for their initiatives. Fortunately, some national governments are responding to the challenge of formulating comprehensive national social protection plans. One example comes from Senegal where the government adopted a plan of this kind in 2005 (van Ginneken, 2007). It was assisted in this task by the ILO which drew on its international experience to advise on feasible strategies for extending social security coverage. The plan proposes that coverage of the statutory social security system be expanded incrementally from about 17 per cent of the population working in formal wage employment to include larger numbers of workers in the informal economy. It is hoped that between 20 and 50 per cent of the population will be

Conclusion 143 protected by 2015. Similarly in Thailand, the government has been promoting social security expansion particularly since the 2000s, and as far as the health sector is concerned, universal coverage has in principle been attained. Although its financial sustainability is being debated, this expansion was made possible through government commitment and spending.

Policy interventions and the role of partners Policy interventions that promote the transition from mutual aid to microinsurance should focus on different partners involved in the process of promoting the transition from mutual aid to microinsurance. These should be directed at existing informal mutual aid associations and also at nongovernmental organizations that do not currently provide microinsurance. Policy interventions should also be directed at existing nongovernmental microinsurance providers and at governmental and commercial insurance providers. Governments and donors can support existing mutual aid associations that wish to formalize their activities and improve the effectiveness of their services. Unfortunately, policies concerned with formalizing mutual aid have often been restricted to regulating their activities. Many countries require that mutual aid associations, like all nongovernmental organizations, register with the state and provide annual reports and audits. Failure to comply with these regulations is subject to criminal prosecution. In reality, however, few grassroots mutual aid associations do register. As was noted in Chapter 2, few burial societies in Botswana have registered with the government’s Registrar of Societies even though they are required to do so. Since regulatory policies of this kind are usually ineffective, an incentive-based approach designed to support mutual aid activities and facilitate their formalization should be adopted. Of course, this does not preclude the introduction of regulations to prevent fraud and abuse. Generally, the members of mutual aid associations approve of controls of this kind but, rather than imposing them, it is preferable that these regulations be formulated in cooperation with the leaders and members of mutual aid associations. A facilitative approach directed at existing grassroots mutual aid associations involves a number of steps including giving legal and institutional recognition to these organizations in order to legitimize their status. Technical assistance and advice with regard to governance, accounting, record-keeping and other activities should also be given priority. As several commentators (Churchill, 2006; Loewe, 2006) have pointed out, there are formidable challenges in making the transition from small-scale, informal mutual aid to formal insurance. Microinsurance providers will need to adopt policies and procedures that create confidence among clients and ensure the reliability of their services. In addition, they need to understand the principles on which insurance is based as well as the risks in providing products suited to the needs of their clients. The moral hazards discussed in Chapter 1 obviously need to be addressed. Chapter 3 on India informed that various measures designed to avoid adverse selection and moral hazards have been adopted by state-run corporations, private companies and nongovernmental microfinance

144 Mitsuhiko Hosaka and James Midgley institutions. The relative advantages of using microfinance institutions as sponsoring organizations were noted in terms of their organizational and communication skills. Technical assistance may come from governmental or nongovernmental organizations that have expertise in microinsurance. Access to legal services and experts who can assist in the preparation of audit reports should also be made available. Workshops where the leaders and committee members of mutual aid associations can be trained in the techniques of operating microinsurance programmes should be convened. As demonstrated by the Sri Lankan and Thai case studies, dialogue and sharing of experiences is a vital source of innovation. In addition, technical assistance is required to utilize actuarial models that permit an appropriate assessment of risks and to formulate effective investment strategies. This will ensure that microinsurance organizations invest their resources appropriately and are able to meet the claims of their members. Grassroots mutual aid associations making the transition to microinsurance will need assistance if errors of this kind are to be avoided. It was reported in Chapter 4 that CARD introduced a pension scheme in the Philippines without first testing its viability through a proper actuarial review. Although the scheme was well received by the organization’s clients, management soon realized that it was at risk of incurring major losses. To solve this problem, a new member-owned and managed mutual benefit association was created under Philippine law and the assistance of insurance professionals was obtained to determine the premium rate needed to ensure its viability. Sri Lanka’s Women’s Co-op provides an example of how informal funeral insurance practices evolved into a standardized life insurance scheme through mutual learning opportunities. In their trial-and-error efforts, with consultation and experience sharing, the organization undertook an extensive community survey and analysis of member’s needs, and also assessed the costs of providing microinsurance services. Another step is to increase the access of existing mutual aid associations to external resources such as banks so that regular accounts can be established to deposit members’ contributions. When microinsurance is combined with microfinance, premiums are often utilized for lending and no funds are accumulated but, as operations expand, depositing funds in bank accounts is desirable for safety purposes and for capturing bank services and resources. Since poor people seldom have access to banks, grassroots mutual associations need assistance in securing services of this kind. It is very important that they are able to gain access to banking services if they are to expand their activities and evolve into formal microinsurance organizations. Mutual aid and microinsurance organizations also need financial backing in the form of subsidies and guarantees. Many associations that have great potential to provide effective insurance services are severely hampered by lack of funds. While subsidies should be carefully allocated, they can play a major role in securing the fiscal viability of these organizations. As shown in Chapter 6 on Thailand, CODI supplemented local community welfare funds with the result that village people contributed about 70 per cent of the total. Subsidies can also be extended to individual members. For example, members’ savings deposits could be matched

Conclusion 145 to increase their value and, in this way, income transfers that alleviate poverty may be introduced. Those that are already financially viable may not need subsidies, but they can benefit from other financial services such as advice on investing accumulated resources. The case study on India (Chapter 3) revealed that some microfinance institutions have an advantage in that they have already acquired expertise in credit services which helps them to judge where accumulated funds from insurance premiums can best be invested. However, this is not the case with many other microinsurance organizations which would benefit from expert advice from well-established organizations. In addition, mutual aid and microinsurance organizations need assistance in securing loans and investment guarantees. During the recent global financial crisis, governments demonstrated a willingness to subsidize and provide guarantees to large commercial investment banks and insurance companies, and they should show a similar willingness to support organizations concerned with poverty reduction. Policy interventions should also be directed at nongovernmental organizations that do not currently have microinsurance programmes but whose povertyreduction activities could be augmented by the introduction of these services. Nongovernmental organizations have proliferated in the developing countries since the 1980s and many are now owned and managed by local people themselves. They have great potential to promote microinsurance, but few have expertise in this field and many lack resources. For this reason, the same policy interventions that support grassroots mutual aid associations should be adopted. In addition to providing technical assistance, support with training, access to external resources and financial aid will be needed. Systematic outreach to nongovernmental organizations to inform them about the benefits of microinsurance and to help them establish these programmes should also be provided. In addition to targeting individual organizations, conferences and workshops to promote this goal should be convened. Existing nongovernmental microinsurance providers should be more effectively used to reach out to nongovernmental organizations. Attention should focus particularly on faith-based organizations whose contribution to development has in the past been neglected. As Fikkert (2005) reveals, faith-based organizations are becoming much more involved in microinsurance today and have a major role to play. It was also shown in Chapter 8 that Islamic mutual aid associations in Indonesia are now playing an increasingly important income protection role by funding community for social protection and economic development projects. Nongovernmental organizations with existing microinsurance programmes should be assisted to enhance and refine their services. These organizations include highly specialized microinsurance providers as well as other nongovernmental organizations that offer microinsurance as a part of a wider range of povertyreduction activities. These organizations have already acquired a great deal of expertise and experience in the microinsurance field, and can play a leading role in promoting its spread. Existing microfinance organizations that have recently introduced microinsurance services on a significant scale, such as FINCA and the Grameen Bank, also have a major contribution to make.

146 Mitsuhiko Hosaka and James Midgley Nongovernmental microinsurance and microfinance organizations could provide technical assistance to mutual aid associations wishing to introduce microinsurance products. They could also help to create regional and national federations of microinsurance organizations and effectively lobby for additional resources. They could also help to coordinate microinsurance initiatives and play a role at the international level by assisting nongovernmental organizations in other countries to expand microinsurance services. They could also represent national microinsurance bodies at international gatherings. As shown in Chapter 4, CARD has played a leading role in the establishment of RIMANSI, a resource centre for microinsurance institutions in the Philippines. CARD has also assisted in the development of microinsurance in Cambodia. However, this does not mean that existing microinsurance organizations do not require assistance, especially in the form of financial resources. Activities such as outreach and giving leadership at the national level involve costs and require support. In particular, new initiatives launched by these organizations deserve to be supported by governments and international donors in the form of funding, credit and guarantees. Finally, policy interventions should be directed at both governmental and commercial insurance firms. As noted in Chapter 2, commercial firms are expanding their operations in the microinsurance field and in some countries, such as Bangladesh and India, they are actively encouraged by governments to do so. Some commercial insurance firms have offered life insurance and funeral policies to poor people for many years and, in addition, some governments own and operate insurance agencies that provide life insurance to the poor. This is the case in India where the government’s Life Insurance Corporation has sought to meet the needs of poor families for many years. Obviously, existing governmental and commercial insurance firms do not need assistance with managing their businesses but they may benefit from advice on how to increase access to poor communities. Existing nongovernmental microinsurance organizations can provide assistance of this kind. A recent development, which was discussed in Chapter 2 and the case study of India in Chapter 3, is the growth of partnerships between nongovernmental providers and governmental and commercial firms. In the health insurance field, nongovernmental organizations have been cooperating with governmental agencies for some time and many examples of this type of collaboration can be given. One example is India’s Yeshasvini Health Insurance Scheme (Kuruvilla and Liu, 2007). As noted earlier, partnerships in other insurance fields such as term life and disability insurance are also becoming increasingly common. In addition, as was shown in Chapter 3, various novel arrangements involving the government, private insurance firms and nongovernmental microfinance institutions have increased poor people’s access to microinsurance in India. High costs are associated with collecting small premiums from large numbers of poor people. Maintaining accounts and assessing claims is also expensive. However, these costs can be managed if nongovernmental microinsurance organizations partner with governmental or commercial providers and assume responsibility for premium collection and for other labour intensive activities. The partner

Conclusion 147 will then be primarily concerned with investing funds, managing the programmes and ensuring an appropriate rate of return. Some examples of this type of partnership were discussed in Chapter 3 on India. The role of commercial providers was also discussed in Chapter 7 on Mongolia, where the especially difficult circumstance of pastoral people poses a unique challenge. Although it was suggested that innovative policies can be developed to bring the insurance industry into the field, it may be preferable to restrengthen herders’ cooperatives to become a partner in insurance services. Obviously, there are challenges in establishing effective partnerships involving commercial providers. In addition to agreeing a clear division of responsibility, the leaders and staff of the respective organizations must develop good interpersonal relationships based on mutual respect and trust (Churchill, 2006). Another major issue for commercial providers, which was discussed in Chapter 2, concerns the conflicting motives of providing quality services and maximizing profits. Although commercial insurance firms contend that they are committed to quality services, problems have been encountered in the past and some proponents of microinsurance are sceptical about the prospect that organizations with such differing goals and methods of operation can create viable partnerships. The pursuit of profit, which characterizes commercial insurance, critics contend, is incompatible with the goal of eradicating poverty. For this reason, some scholars believe that government–NGO partnerships are a more viable option for promoting microinsurance. On the other hand, many governmental organizations lack expertise in the field, and the perennial problem of bureaucratic inefficiency may limit their effectiveness. However, it is possible to redesign the programmes offered by existing governmental insurance providers and to create effective partnerships with nongovernmental organizations. This may be viewed as involving the integration of the statutory system with nongovernmental microinsurance activities rather than the other way round. In India, the government has been implementing a SEWA-inspired health insurance scheme since 2008 and, in turn SEWA has promoted its extension. Large public providers such as India’s General Insurance Corporation and Life Insurance Corporation, which currently issue policies to low-income families, can be encouraged to expand their services in collaboration with nongovernmental microinsurance and microfinance organizations that have experience of working with the poor. In addition, greater use could be made of local state-managed cooperatives in the rural areas of many developing countries. They have historically provided savings and credit services for their members, many of whom are low- or moderately low-income farmers and could readily expand into microinsurance. A neglected but important issue in formulating effective policies for the promotion of microinsurance is the role of evidence-based, evaluative research. More extensive documentation and evaluations of successful innovations that test new initiatives are urgently needed. Monitoring and evaluation may be undertaken along two dimensions. One concerns microinsurance managers and community-based participants who should periodically assess their performance against targets, using simple sets of indicators. This is a goal-oriented approach

148 Mitsuhiko Hosaka and James Midgley and corrective action can be taken if and when necessary. Several agencies have been extending advice on this type of research (ILO, 2007). The other dimension is more process-oriented. Longer term, in-depth documentation and analysis is needed to understand how interventions have brought about changes in relationships among actors involved in microinsurance, and how such changes have or have not led to more equal access to social protection.

Social security for all It has been the primary contention of this book that policy interventions directed at specific partners involved in microinsurance need to be effectively linked with wider strategies that integrate formal and non-formal social security and extend coverage to all. Building on interventions that strengthen the microinsurance services of different partners, particular schemes should be more effectively articulated with government programmes. A good starting point is the integration of the mutual aid activities of stable informal sector occupational groups such as market traders, taxi drivers, porters and construction workers who, as noted earlier, often have well-functioning schemes. The legal mechanism of including self-employed workers in statutory social insurance schemes is already widely used but it focuses largely on small, middle-class business owners. Extending these provisions to groups of workers whose contributions can be pooled with those of others is not only feasible but has already been done in several countries. The example of informal sector cigarette rollers or beedi workers in India, who successfully campaigned to join the country’s national retirement system, has been widely documented (Kelles-Viitanen, 1998). In South Africa, the government modified the country’s social insurance and employment scheme to include domestic servants (Ally, 2009). Well-established microinsurance funds could also be brought into the statutory system; for example, to provide limited survivor or long-term disability benefits. As shown in Chapter 6, community-initiated welfare programmes based on community funds in Thailand have been instrumental in filling gaps in government medical schemes and old-age pensions. In addition to integrating microinsurance initiatives with the formal social security system, efforts to expand existing social security schemes should be redoubled. This is already occurring in some countries such as South Africa where social assistance has been effectively used to extend coverage to poor families particularly in the rural areas. In other countries, such as Botswana, Lesotho and Namibia, universal pensions to protect the elderly have been introduced. Brazil and Mexico have led the world in the adoption of conditional cash transfers and greater use of public works, and similar programmes have been introduced in Ethiopia, India and elsewhere. These and similar initiatives have, as Midgley (2010) points out, had positive consequences for poverty reduction. Together with systematic efforts to integrate mutual aid and microinsurance with the statutory system, social security coverage can be gradually extended. However, much more needs to be done if the goal of ensuring social protection for the world’s people is to be achieved. In addition, a far greater international

Conclusion 149 commitment to promoting universal income protection and eradicating poverty in the developing world is required. Many Western governments are today actively supporting policies and programmes designed to achieve the poverty-reduction targets set by the Millennium Development Goals but progress has been slow and uneven. Although proposals to impose a Tobin-type tax on global financial transactions to fund the expansion of social security have previously been made (Midgley, 2010; Townsend and Gordon, 2004), no definite action has been taken. Similarly, the ILO’s call on Western governments to allocate a small proportion of their aid budgets for social security expansion has not produced a significant response (Cichon and Hagemejer, 2007). Clearly, greater political commitment from the international community is needed. Hopefully, this book will show that grassroots social security efforts and the emergence of microinsurance deserve greater international support.

References Ally, S. (2009). From Servants to Workers: South African Domestic Workers and the Democratic State. Ithaca, NY: Cornell University Press. Churchill, C. (ed.) (2006). Protecting the Poor: A Microinsurance Compendium. Geneva: International Labour Organization. Cichon, M. and Hagemejer, K. (2007). ‘Changing the Development Policy Paradigm: Investing in a Social Security Floor for All.’ International Social Security Review 60 (2/3), 169–196. Fikkert, B. (2005). ‘Fostering Informal Savings and Credit Associations,’ in J.M. Dean, J. Schaffner and S.L.S. Smith (eds) Attacking Poverty in the Developing World. Federal Way, WA: World Vision, pp. 77–94. International Labour Office (2007). Health Microinsurance Schemes: Monitoring and Evaluation Guide, volumes 1 and 2. Geneva: ILO. Kelles-Viitanen, A. (1998). ‘Social Security for Unorganized Women Workers,’ in W. Van Ginneken (ed.) Social Security for All Indians. Delhi: Oxford University Press, pp. 113–130. Kuruvilla, S. and Liu, M. (2007). ‘Health Security for the Rural Poor? A Case Study of a Health Insurance Scheme for Rural Farmers and Peasants in India.’ International Social Security Review 60(4), 3–21. Loewe, M. (2006). ‘Downscaling, Upgrading, or Linking? Ways to Realize MicroInsurance.’ International Social Security Review 59(2), 37–59. Midgley, J. (2010). ‘The Role of Social Security in Poverty Eradication: An International Review,’ in J. Midgley and K.L. Tang (eds) Social Policy and Poverty in East Asia. The Role of Social Security. New York: Routledge, pp. 16–44. Townsend, P. and Gordon, D. (2004). ‘Conclusion: Constructing an Anti-Poverty Strategy,’ in P. Townsend and D. Gordon (eds) World Poverty: New Policies to Defeat an Old Enemy. Bristol: Policy Press, pp. 413–432. van Ginneken, W. (2007). ‘Extending Social Security Coverage: Concepts, Global Trends and Policy Issues.’ International Social Security Review 60(2/3), 39–59.

Index

Note: Page numbers followed by ‘t’ refer to tables. Aarogya scheme 89–90 Abeyratne, S. 81 accident insurance 47, 55, 72, 113 accidental death insurance 52, 59, 70, 71 accumulating savings and credit associations (ASCAs) 17, 18, 21, 25, 32, 33 Acharya, A. 62 adverse selection 32, 60, 75, 118 Africa: erosion of traditional forms of support 30–1; mutual aid associations 21, 22–3; social security schemes in 7; traditional banks 26 Ag Bank 115 Ahuja, R. 54 AIDS 31, 107 AKAP CARD 72 Al-Falah Social Foundation 129, 130 All-Loans Insurance Package 71–2 Allen-Mills, T. 41 Ally, S. 48 Amenomori, T. 38, 40 Apt, N.A. 31 Ardener, S. 21, 22, 23, 24, 32, 33 arisans 22, 123; see also ROSCAs Armed Forces of the Philippines Mutual Benefit Association 68 Arogya Raksha scheme 54 artisan guilds 18–19 Aryeetey, E. 23 ASCAs see accumulating savings and credit associations (ASCAs) Athreye, V. 50, 58 Atim, C. 62 Automatic Loan Offsetting after Disability (Auto LOAD) Benefit 72 Azaiza, F. 31

Badan Amil Zakat Ifaq Shadaqah (BAZIS) 129, 130 Baitul Mal wa al-Tamwil 123–4, 128, 129, 131–3 Bangladesh 24, 26, 38–9, 146 banks: CARD’s transformation into a bank 69–70, 75; community 99; delivering microfinance 48, 53, 54, 58, 64, 116–17, 144; discrimination against women 23; factors preventing poor people’s use of 48; in Mongolia 115–17; mutual aid associations’ need to access resources of 30, 83, 144; traditional African 26 Barua, D. 38 Base Insurance Product 119, 120 beit-ul-mal 128, 131 benefit associations 4, 16; see also mutual aid associations Besley, T. 25 Bill and Melinda Gates Foundation 39, 141 Boemipoetra mutual fund 126 Bortie-Doku, E. 23 Botlhole, T. 22, 34 Botswana: burial associations 32–3, 143; informal financial institutions 34; membership of mutual aid associations 22; pensions for the elderly 148 Bouman, F.J.A. 25 BRAC 38 Bruce, B.T. 20 Buckowski, G. 70, 71 Buddhist savings group 103–6, 107–8, 141 Build, Operate and Transfer (BOAT) 73 burial/funeral societies 16, 19, 35, 82; in Botswana 32–3, 143; CARD 64, 70;

Index 151 efforts to regulate 32, 37; in Ethiopia 37; problems with abuse of 29, 32–3; in South Africa 38; in Thailand 101, 102, 105; Women’s Co-op 82, 87–8 Burman, S. 23, 33 CARD (Center for Agricultural and Rural Development): see Center for Agricultural and Rural Development (CARD) Castells, M. 80 Center for Agricultural and Rural Development (CARD) 9–10, 37, 64, 69–77; All-Loans Insurance Package 71–2; background 69–70; Bank 69–70; burial scheme 64, 70; claims settlement policy 73; collaborations 73–4, 146; educating public over microinsurance 73; emergence of MBA 64, 70–1, 144; facilitating microinsurance partnerships 69, 73; future developments 76–7; government regulation of 74, 76; insurance services 71–3; pensions, old age 10, 70–1, 144; pioneer of grassroots microinsurance 69–70; reasons for success of MBA 75–6 Center for the Development of Microenterprises (Pusat Inkubasi Bisnis dan Usaha Kecil (Pinbuk)) 131, 132, 133 cestas: see ROSCAs Chen, M. 37 children: assistance with costs of educating 19, 72, 87, 100, 102, 105, 130, 132; bereaved 18, 90, 132; in debt bondage 26; life insurance plans covering 49, 51f; medical insurance for 54; support networks in caring for 30, 31 children’s homes 98 China: Grameen Bank ventures in 41; People’s Insurance Company 37; study of caring for children in 31 Chit Funds 17, 33, 37 Chotikapanich, D. 80 Churchill, C. 41, 143, 147 Cichon, M. 149 Civil Service Pension Scheme 81–2 Civil Service Scheme 96, 97 claims processing 59, 73 Clifford, W. 30 Cockburn, C. 30 Collins, D. 26, 29, 32, 33, 34, 37, 38, 39, 40

Colombo Women’s Thrift and Credit Cooperative Society 83 commercial insurance providers 58, 141, 142, 146, 147; administration and marketing costs 75; in India 38–9, 40–1; lifting of ban in India on 38, 39, 52–3; market in Thailand 97, 106; microinsurance collaborations in India 39, 50t, 53–4, 58, 62, 146; in Mongolia 118, 120, 147; in the Philippines 67 communitarian 5 Community Organization Development Institute (CODI) 10, 99–102, 141, 142, 144; support for savings groups 101, 104, 107, 108 community welfare funds 99–102, 105–6, 107–8 confraternia 19, 20 Co-operative Development Authority 68 Co-operative Insurance System of the Philippines 68 Co-operative Societies Law 90 co-operatives: in Indonesia 131, 132–3; in Mongolia 115, 116–17, 121; movement in Sri Lanka 85–6 see also Women’s Co-op in the Philippines 67, 68 Council for Mutual Economic Aid (COMECON) 110, 111, 112 covariant risks 61 credit-linked life insurance 55 crop insurance 36, 40 Cumper, G. 20 de Bruijn, M. 31 de Waal, F. 3 debt clearance 49, 71–2, 86 Decha Sungkawan 96, 107 Delta Life Insurance Company 38 Dercon, S. 25 Dhemba, J. 32 disability benefit 66, 96, 148 disabled people 98, 113 disaster relief: see natural disasters Disaster Response Product 120 dividing societies 4, 19 Dompet Dhuafa Republika 130 Dowla, A. 38 Dreze, J. 45 Dror, D.M. 31, 40 Duflo, E. 25 dzud 110, 112, 116, 117; Disaster Response Product 120; forecasting systems 118, 121–2; index-based insurance for herders 118–20

152 Index education, assistance with costs of 19, 72, 87, 100, 102, 105, 130, 132 elderly people 6, 13, 31; welfare fund in Thailand 100–1, 105 Elderly Welfare Fund 100–1 Employees’ Provident Fund 81 endowment schemes 37, 55 esusu 26, 32 Ethiopia 37, 148 ‘exhaustion point’ 119 facilitative approach 140–1, 143 family and kin relationships 2 Fikkert, B. 145 financial crisis in Asia 1997 95, 96, 100, 125 financial management by poor people 24–7, 34 FINCA 38 First Community Cooperative 68 Forteza, A. 7 friendly societies 4, 6, 19, 20 funeral societies: see burial/funeral societies Geertz, C. 21, 22, 24, 25, 28, 123 Germany 6, 20 Getubig, I.P. 133 Ghana 23 Gilbert, N. 133 Gonzales, E. 66, 67 Government Service Insurance System 66, 67 governments: extending microinsurance 8, 54–5, 140–3; and formalization of mutual aid 8, 37, 39, 140, 143–8; need to formulate comprehensive social security plans 11, 142; and partnerships with NGOs 40, 146–7; to support and integrate non-formal social security 5–6, 24, 91–3, 133, 139–40, 142, 148–9; Women’s Co-op collaborations with 91–4 Grameen Bank 10, 35, 38, 41, 69, 131, 145 grassroots social security systems 10; community welfare funds in Thailand 99–102; governments to support and integrate with formal social security 11, 24, 91–3, 133, 139–40, 142, 148–9; savings group case study in Thailand 103–6, 107–8; see also Community Organization Development Institute (CODI); Islamic grassroots social security associations; Women’s Co-op

Guaranty Funds 74 Gunatilaka, R. 80 Hagemejer, K. 149 Hall, A. 7 health insurance 20, 35, 36, 55, 146; in Bangladesh 38; CARD-MBA 72; challenges of managing 38, 40, 59–60; in India 40, 51–2, 54–5, 60, 62, 146, 147; in Mongolia 113; Philhealth 65, 66, 67; SEWA 51–2, 60, 147; in Sri Lanka 82, 89–90; in Thailand 98, 102, 143; Women’s Co-op 89–90; Yeshasvini scheme 40, 50t, 54–5, 146 healthcare schemes: 30-baht scheme 98, 102; in Indonesia 126, 130 HIV 100, 106 Hodge, P. 20 housing 31, 72, 83, 99, 102; loans 66, 80, 84, 86, 89, 91 ICICI Bank 48, 53 ICICI-Lombard 50t, 53 ICICI Prudential 53 iddirs 37 identity fraud 61 IKP (Indira Kranti Patham) 54, 57, 59, 61, 62 index-based insurance for herders, pilot project 118–20 India: challenges of microinsurance in 57–61; characteristics of microinsurance in 55–7; Chit Funds 17, 33, 37; collapse of ROSCAs 33; commercial insurance providers in 38–9, 40–1; growth and diversity of microinsurance providers 52–5; health insurance in 40, 51–2, 54–5, 60, 62, 146, 147; insurance sector reform 38, 39, 52–3; livestock insurance 61; microinsurance collaborations in 39, 50t, 52, 53–4, 58, 62, 146; microinsurance providers 50t; policy implications 61–3; sangh 18; social protection through microfinance 48–52; state government microinsurance schemes 54–5; state social security system 47, 61–2; traditional forms of risk management in 47–8; widowhood in 49; see also health insurance Yeshasvini scheme; Self-Employed Women’s Association (SEWA) Indira Kranti Patham (IKP) 54, 57, 59, 61, 62

Index 153 Indonesia: arisans 16, 22, 123; background to social security system 124–5; formal social security system 125–7; overhaul of social security system 126–7, 134; paketans 18; policy implications 133–4; poverty in 125; see also Islamic grassroots social security associations Indonesian Islamic Bank 131, 133 infaq 127 injury insurance 7, 20, 81, 126 Insurance and Regulatory Development Authority (IRDA) 52, 53 Insurance Code 1978 67–9 ‘insurance principle’ 6, 20 international development agencies 5–6, 39–40, 51, 141 International Labour Organization (ILO): Microinsurance Working Group 39–40; promoting formalization of mutual aid 39; see also ‘social security for all’ campaign International Monetary Fund (IMF) 111 IRDA (Insurance and Regulatory Development Authority) 52, 53 Islamic grassroots social security associations 11, 99, 123–4, 127–33; Baitul Mal wa al-Tamwil 123–4, 128, 129, 131–3; formalization of zakat 128–9; LAZIS 123–4, 129–31; policy implications of 133–4 Isong, C.N. 32 Israel, Arab communities in 31 Jacquier, C. 31, 40 Jamaica 20 Jamsostek 126 Janasaviya 81, 82 Japan: invasion of Indonesia 124; Miyazawa Fund 100; mutual aid in rural communities 3–4; ROSCAs in 22 Japan Bank for International Cooperation (JBIC) 111, 112, 113, 118 Jayasuriya, L. 81 Jutsuchon, S. 106 Kalavakonda, V. 50 Kanji, N. 37 Karger, H. 34 Kasente, D. 31 Kelles-Vitanen, A. 146 Kidd, A. 4, 19 Kirsch, R. 2, 24 Kropotkin, P. 2–3

Kuruvilla, S. 40, 146 Latin America 20, 41 LAZIS (Lembaga Amil Zakat Infaq and Shadaqah) 123–4, 129–31 Lembete 33 Lewis, D. 37 life insurance: CARD-MBA 64, 71–3, 74; collection of premiums 56–7; commercially sponsored schemes 38–9, 49, 53; expansion of coverage 49; FINCA 38; government schemes 37, 54, 126; IKP 59; premiums and benefits 55–6; processing of claims 59; regulation in Philippines 74; schemes in Bangladesh 38–9; SEWA 49, 61; SPANDANA 58–9; types of 55; Women’s Co-op 84, 87–9, 144 Life Insurance Corporation of India (LIC) 49, 50t, 54, 58, 146, 147 Lim, Y. 25 Little, K. 21, 22–3, 30 Liu, M. 40, 146 livestock insurance: in India 61; in Mongolia 117–20, 121 Livestock Insurance Indemnity Pool 120 Loewe, M. 31, 35, 38, 39, 40, 143 Lok Swasthya Mandali 51 Lukhele, A.K. 17 Maes, A. 2, 39 Malaysia 128 market liberals 5 maternity benefit 38, 65, 90, 96, 97, 102 McCord, M. 70, 71 Medical Mission Group Hospitals and Health Services Cooperative 68 microfinance: banks delivering 48, 53, 54, 58, 64, 116–17, 144; commercialization and undermining of commitment to poor 41; functions of 48–9, 114–15; in Mongolia 114–17, 121, 122; reasons for default 51; social protection in India through 48–52 microinsurance: administration costs 146–7; benefits of 74–5; beyond reach of many poor people 62; challenges 39–41, 57–61; characteristics of Indian 55–7; claims processing 59; collaborations in Indian 39, 50t, 53–4, 58, 62, 146; commercial providers in India 38–9, 40–1; covariant risks 61; defining 5, 35–6; future developments 76–7, 147–8; and government support

154 Index to extend 8, 54–5, 140–3; growth and diversity of providers in India 52–5; international development agencies involvement 39–40, 50t, 51, 141; methods to promote 140–3; microfinance organizations as providers of 38, 48, 49, 51, 58–9; in Mongolia 117, 118–20, 121, 122; moral hazards 31–3, 37, 40, 60–1; and mutual aid associations 4–6, 37–9; need for evidence-based evaluative research 76, 147–8; NGO’s role 8, 37–8, 53–4, 58–9, 146–7; in the Philippines 67–9, 74; policy interventions and role of partners in 143–8; premiums 55–7, 146; role of 11, 34–9; see also Center for Agricultural and Rural Development (CARD) Microinsurance Innovation Facility 39 Midgley, J. 2, 7, 24, 41, 133, 148, 149 migrants 21, 23, 31 Millennium Development Goals 6, 149 Million Houses Programme 84 Mission Asset Fund 37 Mohul, O. 119 moneylenders 26, 34, 48, 115 Mongolia: commercial insurance in 118, 120, 147; cooperatives in partnership with banks to deliver microfinance 115, 116–17, 121; Council for Mutual Economic Aid (COMECON) 110, 111, 112; internet services 121; livestock insurance 117–20, 121; manufacturing industry 111; microfinance and risk management in 114–17, 121, 122; microinsurance in 117, 118–20, 121, 122; negdels 111, 112, 116, 117, 119; poverty in 110–12; soums 113, 115, 116; State Social Welfare Office 113; statutory social protection 112–14, 121; towards comprehensive social protection 120–2; transition to a market economy 110–12; see also dzud montepios 20 moral hazards 31–3, 37, 40, 60–1, 118, 143–4 Morduch, J. 25, 29, 35, 37, 38, 39, 47 Motor Vehicle Accidental Hospitalization Benefit 72 mutual aid associations 2–4; academic perspectives on 21–7; access to resources of banks 30, 83, 144; benefit associations 4, 16; challenges to 30–4; emergence of microinsurance 4–6,

37–9; features of 16–18; formalization of 8, 37, 39, 140, 143–8; friendly societies 4, 6, 19, 20; government support for 8, 54–5, 140–3; historical perspective 18–21; impact of modernization on 30–1; and ‘irrationality’ of some practices 32; in Japanese rural communities 3–4; in Philippines 68, 74; risk management methods in rural communities 25–7; role in transition from rural to urban life 23, 31, 32; sociological perspective on 22–4; as welfare institutions 24; in West today 18; and wider realities of inequality and exploitation 33–4; women’s involvement with 23–4; see also accumulating savings and credit associations (ASCAs); burial/funeral societies; rotating credit and savings associations (ROSCAs) Narang, A. 54 National Bank for Agriculture and Rural Development, India 52 National Housing Development Authority (NHDA) 83, 84 National Poverty Eradication Programme 101 National Social Assistance Programme 50 natural disasters: insurance 55; LAZIS assistance after 130; preparedness for 47, 61, 93, 112; programmes for 2004 tsunami victims 87, 90–1; see also dzud Navarro, M. 67 negdels 111, 112, 116, 117, 119 Ngwenya 32, 33 Nigeria 21, 22 Nivas, Phra 105 non-governmental organizations: becoming for-profit organizations 58; microinsurance attractive to 75; mutual aid associations evolving into 4–5, 37; offering microinsurance 8, 37–8, 53, 58–9; and partnerships with commercial firms in India 39, 50t, 52, 53–4, 58, 62, 146; in partnerships with government to promote microinsurance 40, 146–7; policy interventions to expand microinsurance services 145–6; see also Self-Employed Women’s Association (SEWA) nursing homes 98

Index 155 ‘Obligations of Insurers to Rural and Social Sectors’ 52 Ockey, J. 99 Okurut 22, 34 Out-of-School Youth Programme 72 paketans 18 Pakistan 128 Paneeto, Phra Subin 103 pawnbrokers 26, 34 Peiris, G.H. 81 pensions, old age 20, 139, 148; CARD development of 10, 70–1, 144; for civil servants and government workers 47, 66, 81–2, 96, 97, 125, 126; commercial providers of 47; efforts to expand 148; government regulation in Indonesia 126; in Mongolia 113; survivors’ 88–9; welfare fund 96, 97, 102 People’s Insurance Company 37 Philhealth 65, 66, 67 Philippine Public Schools Teachers Association Mutual Benefit Association 68 Philippines: microinsurance 67–9, 74; mutual aid associations 68, 74; social protection in 65–7; see also Center for Agricultural and Rural Development (CARD) Poor Law 1601 6 Poor Law 1837 19 populism in Sri Lanka 80 poverty: a challenge to mutual aid 31; in Indonesia 125; in Mongolia 110–12; need for greater commitment to eradicating 149; in the Philippines 65; programmes to alleviate 81, 82, 132; study of management of financial affairs by people in 26–7, 34; in Thailand 101, 106; undermining of microfinance services for alleviation of 41 Prahalad, C.K. 38, 41, 53, 54 Praja Sahayaka Sewaya (PSS) (Community Support Services) 83 premiums, insurance 55–7, 146 Private School Teacher Welfare Fund 97 property insurance 52, 72 provident funds 7, 81, 97, 126 Public Assistance Department 98 Pusat Inkubasi Bisnis dan Usaha Kecil (Pinbuk) 131, 132, 133 Radermacher, R. 54 Rakhitha scheme 88–9

Ranson, M.K. 62 religious bodies: charitable activities 2; confraternia 19, 20; see also Islamic grassroots social security associations; sajcha savings groups resource redistribution 94, 108 retirement benefits, lump sum 72, 90, 126 retirement funds 7, 20, 36 Retirement Savings Fund 72 Reynaud, E. 6, 7, 67, 133 RIMANSI Organization for Asia and the Pacific Inc. 68–9, 73, 76, 146 risk management 1–2, 25–7; in India 47–8; microfinance as a tool in Mongolia for 114–17 ROSCAs: see rotating credit and savings associations (ROSCAs) rotating credit and savings associations (ROSCAs): arisans 22, 123; cestas 17; Chit Funds 17, 33, 37; defaulting 33; features of 16–18; impact on local economic development 24–5; middle-class participation in 22; role in process of modernization 21, 22; stokvels 17–18, 33; tontines 17; women’s involvement with 23–4 Roth, J. 50, 58, 61 Rousseau, J.-J. 2 Roy, A. 41 Rural Development Fund 100 sadaqah 127 Sahara India 51 sajcha savings groups 103–6, 107–8, 141 Samurdhi 82, 91 sangh 18 Sarmiento, F. 69 Saudi Arabia 128 savings accounts 38, 48, 56, 92, 99, 102; Baitul Mal wa-al-Tamwil 132; LAZIS 130; matched 139 savings groups 4, 18, 34, 141; in Sri Lanka 83; in Thailand 99, 100, 101, 103–6, 107–8, 141 Savy, R. 36 Schmidt, R.H. 41 scholarships 19, 72, 87, 100, 102, 105, 130, 132 Self-Employed Women’s Association (SEWA) 37–8; accidental death insurance 52, 59; health insurance 51–2, 60, 147; life insurance 49, 61; managing and marketing of policies in partnership 58, 147; premiums 56;

156 Index property insurance 52; ‘SEWA Social Security’ programme 51; simplification of policies 56; Vimo Saathi 60; Vimo SEWA 37–8, 49, 50t, 51, 55, 58, 59, 60 Sen, A. 80 Senegal 142–3 Shah, M. 51, 59 Shang, X. 31 Shinha, T. 51, 59 Singapore 7, 20 Skees, J. 119 Smillie, I. 38 Social Darwinism 2, 3 social investment 93 Social Investment Fund 100 social security 6–8, 133; coverage in Global South 7; early Western government programmes 6–7; extending 6, 139–40, 142–3, 148–9; governments to support and integrate non-formal institutions 11, 24, 91–3, 133, 139–40, 142, 148–9; in Indonesia 124–7; in Mongolia 112–14, 120–2; non-formal 1–2; in the Philippines 65–7; in Senegal 142–3; in Sri Lanka 10, 80, 81–93; state system in India 47, 61–2; in Thailand 95–9, 106, 143; trade unions lobbying for statutory 20; see also grassroots social security systems; Islamic grassroots social security associations ‘social security for all’ campaign 6, 7–8, 24, 134, 139, 148–9 Social Security System (SSS) 65–6, 67 Soto, H. 41 soums 113, 115, 116 South Africa: collapse of ASCAs in 33; extension of social insurance in 148; financial affairs of poor people 26; funeral societies 38; life insurance 38; stokvels 17–18, 33 South America 7 SPANDANA 58–9 Sri Lanka: cooperative societies 85–6; grassroots social security 86–91; implementation problems with state social services system 80; integration of statutory and grassroots social security systems 91–3; populism in 80; savings groups in 83; social security system 81–3; see also Women’s Co-op Sri Lanka Women’s Development Services Cooperative Society Ltd. 83; see also

Women’s Co-op State-Owned Enterprise Scheme 97 stokvels see rotating credit and savings associations (ROSCAs) Subhani scheme 88 Subhasadhaka welfare fund 87–8 Suharto, General 125 Sukarno, President 124–5 Tambon Administrative Organization 101, 104, 105 Tambon Khamong 104–6 tambon welfare funds 101–2 TATA-AIG 50t, 53, 58 Thailand: 30-baht scheme 98, 102; background 95–6; burial societies 101, 102, 105; Civil Service Scheme 96, 97; community bank 99; community welfare funds 99–102, 105–6, 106–8; Elderly Welfare Fund 100–1, 105; healthcare 98, 143; policy implications of community welfare 106–8; poverty 101, 106; Rural Development Fund 100; rural economy 106; savings groups in 99, 100, 101, 103–6, 107–8, 141; Social Security Office (SSO) 97; statutory social security system 95–9, 106, 143; see also Community Organization Development Institute (CODI); Urban Community Development Office (UCDO) Titmuss, R.M. 29 tontines: see ROSCAs Townsend, P. 149 Townsend, R. 25, 35 trade unions 6, 19–20, 86 tsunami 2004 87, 90–1 Uganda 31, 38 unemployment 16, 65, 100, 111 unemployment benefit 7, 16, 113 unemployment insurance 47, 112–13 United Nations 6, 7, 36, 65 United Nations Development Program (UNDP) 80, 82, 96, 98, 115 United States of America 7, 34, 36, 39 Urban Community Development Office (UCDO) 99, 100; see also Community Organization Development Institute (CODI) van Ginneken, W. 7, 24, 39, 62, 142 Van Leeuwen, I. 24, 33, 35 Vidanapathirana, U. 80

Index 157 Vimo Saathi 60 Vimo SEWA 37–8, 49, 50t, 51, 55, 58, 59, 60 von Benda-Beckmann, F. xii, 2, 24, 123 von Benda-Beckmann, K. 24 wedding services 17, 72, 87, 133 welfare state 79, 81, 107 widows 6, 18, 19, 20, 49, 132 women, empowerment of 23–4, 48, 54, 58 Women’s Co-op: assets 86; background 83–4; bereaved children 90; burial society 82, 87–8; collaborations with government and external agencies 91–4, 142; community-initiated social security schemes 86–91; disaster relief 90–1; education packages 87; healthcare scheme 89–90; housing loans 84; legal status 86; life insurance 84, 87–9, 144; loans 85, 86–7, 91;

management structure and operating processes 85–6; maternity benefit 90; membership 86, 93; National Executive Council 83, 85, 86; Rakhitha scheme 88–9; Subhani scheme 88; Subhasadhaka welfare fund 87–8 Workmen’s Compensation Act 97 World Bank 36, 54, 82, 100, 106, 111, 113, 118, 141 World Health Organization 40 Xac Bank 115, 116 Yeshasvini Trust see health insurance Yeshasvini scheme Yunus, Muhammad 35 zakat 125, 127; formalization of 128–9; use by LAZIS of 129 Zimbabwe 32–3