Rwanda’s forgotten pillar of development

There was a popular joke in the late nineties about Kigali’s richest man being named “Bikonje”. Apparently, a Muganda mechanic on first arriving in Kigali, noticed that every street seemed to be lined with shop-signs reading “Amata na Fanta bikonje”. He figured out that all these shops sold milk and sodas but could not work out what “Bikonje” really meant! Then it hit him; surely it must be the proprietor’s name! He immediately concluded that Bikonje must be the wealthiest man in town. Haven’t you ever wondered why there are so many almost identical ‘Quincaillerie’ all around Kigali? If not at least you have noticed the mushrooming coffee shops around town since the Bourbon Coffee brand launched in 2007. Maybe you are not a coffee person but surely the trending lounge/sports bar concept has not escaped your attention? The question that often follows is this; “do all these businesses make decent profits?” I call this the ‘copycat business trend’. Once one business model is seen to be successful, a batch of very similar businesses crop up without any significant effort to differentiate through innovation. While the trend may be puzzling for the average man on the street, the answer lies in understanding the economics of business risk. For the individual small business entrepreneur, the idea of elaborate risk analysis is unattractive and most times viewed as not worth the effort and resources. For most people, “to see is to believe”. Psychologists refer to this behaviour as ‘herd mentality’. The assumption is that if it has not been done before, it isn’t worth trying. In financial terms, this phenomenon is characteristic of individuals referred to as being “risk averse”. For a society that is used to surviving off so little, it is unimaginable for most Rwandans to risk the little one already has for uncertain returns in the future. As the saying goes, “a bird in hand is worth 2 in the bush.” To overcome the culture of ‘safety first’ caused by the perceived high risk of venturing into new businesses, Rwandans need to embrace insurance. The current attitude towards insurance is that it is an additional cost to doing business without any obvious direct benefits. Rwanda’s reported insurance penetration level of under 2% reflects an uncharacteristic ‘below par’ performance as compared to the developing nations’ combined average of 2.9%. Why is insurance an important component in the development process of any nation? Rwandans need to begin by understanding that insurance involves the “pooling of individual risk” and by paying a relatively small fee (premium) to an insurer, the individual is guaranteed to be protected from losses resulting from a specific risk within the validity period of the insurance policy. The larger the number of people insured for a given risk, the lower the individual fee or premium. The logic is that it is highly unlikely for a large number of insured individuals to suffer losses from the same risk at the same time. An example would be the occurrence of fires. If all buildings in Kigali had fire insurance and a fire burnt down one of the buildings, it would be much cheaper for insurers to pay out from the large pool of premiums collected from all the building owners as opposed to when only a few are insured. Beyond reducing the insured individual’s risk of doing business, insurance in general plays an additional 3 key roles in the economy; 1. Mobilising funds for institutional investment. Insurance companies undertake investment activities in a bid to grow the funds paid to them as premiums so as to be in a position to pay out when claims are made in the future. The investments help to grow a country’s economy as a whole. 2. Supporting banking institutions in deepening financial inclusion and attracting individuals and businesses to participate in the formal economy. This is particularly good news to the tax authorities because it ultimately widens the tax base. 3. Boosting confidence in the economy. By creating an efficient mechanism for transferring risk from the individual businesses to the insurers, the overall risk within the economy is reduced. Investors will view an economy more favourably if perceived risk of doing business in it is relatively low. The Rwandan insurance industry has to take on the challenge of creating products that suit a significant part of the population. In recent years, micro-finance institutions and saving schemes have succeeded in attracting previously excluded individuals to the formal sector. About 68% of adult Rwandans are financially included in the formal sector as per the 2016 Finscope survey report. This is a solid platform upon which the insurance industry can ride to achieve deeper market penetration. The focus should be on micro insurance products especially targeting the agricultural sector which employs over 80% of Rwanda’s population. Examples of required but currently missing policies include ‘seed and other inputs’ guarantees in case of poor harvests, access to water in case of failed rains, to mention but a few. Existing products like life and disability insurance can also be made more affordable through smaller daily or weekly payments similar to the collections done by “Abamotari” in their co-operatives. These products should be accessible through mobile money via phones whose penetration rate is over 78% of the total population as of March 2016. The insurance industry cannot continue to do things the same way they have always done and expect to remain relevant in the technology driven age of social media and virtual reality. It is time to go back to the drawing board and create appropriate solutions for today’s problems. The writer is a consultant and trainer specializing in Finance and Strategy. He is based in Kigali.

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Rwanda’s forgotten pillar of development