Faisal Sebaggala Lubwama-Market Development Officer at the Insurance Regulatory Authority
In Uganda, access to credit is increasingly becoming a lifeline for many Ugandans, understanding the tools that safeguard borrowers and lenders is more critical than ever. According to the United Nations Capital Development Fund (UNCDF), approximately 77% of Ugandans borrow money, but only 31% borrow from formal financial institutions. The FinScope Uganda 2023 survey also shows that 81% of adults are financially included, meaning that they use and have access to financial services, including credit, and insurance.
These statistics not only highlight the growing demand for credit, but also underscore the risks for both borrowers and lenders associated with borrowing without adequate protection. Even among formal borrowers, understanding of these protective tools such as insurance remains low.
There is a gap within the credit ecosystem where borrowers are exposed to financial distress, and lenders to repayment risk, especially when unexpected events like death or permanent disability occur. This is where Credit Life Insurance becomes not just relevant but essential, bridging the gap by offering a safety net to both borrowers and lenders.
Credit Life Insurance by definition is a type of life insurance policy taken out to cover the borrower’s outstanding loan balance in the event of their death or permanent disability, suffer critical illness, loss of income or loss of employment through retrenchment, before the loan is fully paid. In such unfortunate circumstances, the burden of the unpaid loan does not fall on the borrower’s family, or guarantors. Instead, the insurance company pays off the remaining loan amount directly to the lending institution.
While credit life serves the dual function of protecting both parties, it is important to emphasize that the lender is the direct and primary beneficiary of the policy. The payout goes exclusively to the lending institution, not to the borrower’s family or heirs. The benefit to the borrower lies in the relief from burdening loved ones, co-signers, and guarantors with financial obligations, and the peace of mind that their liabilities will not outlive them.
According to the FinScope survey 2023, at least 7% of borrowers prefer to borrow from commercial banks and MDIs. Over time, these institutions have adopted credit life insurance, and it is, now, part of industry best practice and risk management to safeguard credit portfolios.
Credit Life Insurance policy can also be customized to include additional riders or add-ons such as cover for critical illness, loss of income, retrenchment (involuntary loss of employment), or even funeral benefits in a bid to offer a more comprehensive safety net. It is important to note, however, that these riders are not mandatory and do not always cover the full loan amount. They are negotiated separately based on the insurer’s terms and conditions. Borrowers should always seek clarity on these additional options and assess their relevance to their type of loan and financial needs.
It is imperative for lending institutions to fully inform borrowers about the policy terms and conditions with special attention to exclusions before they commit to a loan. For example, Credit Life Insurance typically does not cover loan defaults due to poor business decisions, voluntary default, or misuse of funds. These are not considered insurable events, and in such cases, the lender retains the right to pursue recovery, including through collateral seizure or legal action.
It is therefore crucial to demystify a common misconception: if a loan is written off by a lender, it does not automatically qualify for an insurance pay-out. A loan write-off is a financial decision made by the institution when all avenues of recovery have failed, and it does not imply that the insurance company has stepped in, unless the cause of default falls within the insured risks.
This product, by its design, directly supports the sustainability of the country’s credit system, enabling lenders extend credit more confidently, knowing that their risk exposure is minimized. For all parties involved, this kind of security contributes to healthier and financial planning, responsible and peaceful borrowing, and a more resilient financial system.
As the Insurance Regulatory Authority, we are cognizant of the importance of Credit Life Insurance, as a vital component of Uganda’s financial inclusion agenda. We remain firmly committed to protecting and promoting policyholders’ interests and continue to educate borrowers on their rights, and to work with lenders and insurers to foster transparent and fair lending practices.
If you’re considering taking a loan- whether for education, business, or personal development, ask about credit life insurance, don’t just borrow, borrow smart, understand it, demand for clarity and most importantly, borrow wisely!
The writer is a Market Development Officer at the Insurance Regulatory Authority.
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