Costs of non-performing loans can be moved to paying for health insurance and expanding universal health coverage (UHC). Health insurance for microloan borrowers and their families, can reduce the high non-performing-loan cost borne by vulnerable borrowers, and redirect the cost saving into health insurance and expanded UHC.
How to unlock billions for health financing
As global aid budgets are under increasing pressure and one in four aid dollars disappeared last year, the question is no longer only how much aid is provided — but how each aid dollar can generate the greatest possible long-term impact. That is why development debates are increasingly centred around domestic resource mobilization, catalytic use of aid, and risk reduction.
International and Norwegian development actors now discuss a critical question: “How can countries finance their own development — and should we help?” It is a necessary discussion at a time when aid budgets are tightening and financing gaps are growing. Yet one potentially transformative system mechanism remains largely absent from the debate: the relationship between Health and Financial Risk.
Health protection is not only a social cost. It may also function as an economic stabilizer capable of reducing credit risk, strengthening local financial systems, and contributing to more sustainable capital mobilization.
Across large parts of Africa, microfinance institutions already finance school fees, water infrastructure, climate adaptation measures, and small businesses. Yet the same financial infrastructure is rarely used to support health protection — even though illness remains one of the leading drivers of loan default and economic vulnerability among low-income households.
This reveals a major blind spot in today’s development financing architecture.
From Credit Losses to Health Financing
Health and finance continue to be treated as separate sectors, despite being deeply interconnected in practice. For low-income households, illness, debt, repayment capacity, and economic survival are inseparable. Yet much of development policy still treats health as a purely social issue, disconnected from financial systems and capital markets.
Over the past decades, extensive financial infrastructures have emerged across African markets. Institutions such as IFC, Norfund, Goodwell and Abler Nordic have invested substantial capital into microfinance banks. This is no longer simply about small loans. It is about building financial systems capable of reaching millions of people excluded from traditional banking.
At the same time, health financing remains heavily dependent on fragmented aid programs, donor-funded pilot projects, and short-term subsidies. The paradox is therefore striking; while credit infrastructure, payment systems, and distribution networks already exist, health protection is still treated as if the infrastructure must be built from scratch.
This is a systemic failure. In practice, health risk is also a driver of credit risk. When low-income households are hit by illness, incomes often fall at the same time that healthcare costs increase. The result is not only social vulnerability, but also loan defaults, higher provisioning costs, and more expensive capital.
In today’s development debate, “derisking” is often discussed in the context of large-scale investments and private capital mobilization. Yet experiences from the microfinance sector suggest that basic health protection may itself function as a form of systemic derisking in low-income markets.
Lessons from the Field
Operational experience from microfinance-linked health insurance programs in Kenya illustrates how closely health and financial risk are connected. In some lending portfolios, average microloans are around USD 350, carrying annual interest rates of approximately 33 percent and non-performing loan (NPL) levels around 14 percent. At the same time, experience indicates that when borrowers and their families are included in basic health insurance schemes, NPL levels in some portfolios can fall to around 4 percent.
The economic implications are massive. For a typical microloan, the reduction in expected credit losses alone can correspond to approximately USD 50 per loan. In today’s insurance market, that amount can be sufficient to finance basic health insurance coverage for a borrower and their family, including hospital coverage of around USD 1,500.
Scaled across larger parts of the microfinance market, the implications become substantial. In Kenya alone, similar reductions in credit losses could potentially free up billions in local capital that might otherwise have been absorbed by defaults and high lending costs.
At the same time, lower credit risk can strengthen the financial sustainability of the microfinance institutions themselves. Operational portfolio experience suggests that the combination of reduced defaults and integrated health protection can create significantly stronger financial resilience than traditional lending models.
This points toward a largely overlooked insight in development policy: part of the cost of health risk is already priced into the financial system through high credit risk, high interest rates, and large loan-loss provisions. If improved health protection reduces this risk, some of the capital currently absorbed by financial losses could instead finance health protection itself.
From Aid Dependency to Capital Mobilization
This also challenges how development assistance has traditionally approached health financing. Large parts of today’s health financing models remain dependent on continuous subsidies, donor funding, and project-based mechanisms. Such support will remain essential in humanitarian crises and for the most vulnerable populations.
However, if better health protection simultaneously strengthens repayment capacity, reduces credit risk, and releases capital within local financial institutions, it may also open the door to a different type of development financing — one based on self-reinforcing economic mechanisms rather than permanent external support.
Health financing therefore becomes more than social protection alone. It also becomes a question of domestic capital mobilization, risk-sharing, and how aid can be used more catalytically to strengthen existing economic infrastructure. Digital infrastructures now make it possible to integrate health protection more directly into existing financial relationships through microfinance, payment systems, and risk-sharing mechanisms.
This is not about replacing public healthcare systems or the role of the state. It is about recognizing that existing financial systems already reach large parts of the population — and that these structures can potentially be used far more strategically than they are today.
A New Development Debate
Norwegian development policy is already moving toward stronger emphasis on system effects, domestic resource mobilization, catalytic use of ODA, derisking, risk-sharing, and how aid can unlock larger long-term development impact.
That is a necessary shift. If better health protection can simultaneously reduce credit risk, strengthen financial portfolios, and release local capital, this points toward a different approach to development financing — one where aid is increasingly used for derisking, risk- sharing, and mobilization of sustainable local systems.
Perhaps the most important unanswered development policy question is no longer simply how to finance health in isolation — but how health can become an integrated part of more resilient and inclusive financial systems.
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