Optimal Packaging of Insurance and Credit for Smallholder Farmers in Africa

Lead Research Organisation: University of Greenwich
Department Name: Natural Resources Institute, FES

Abstract

Farm households in Africa must cope with bad conditions as to soil quality, weather and infrastructure. The variability of rainfall causes yields to vary strongly from one year to the next. With yields already low (due to poor soil condition) these variations can be life threatening. Meanwhile, inadequate infrastructure makes it difficult to help the households with access to financial services, insurance and inputs that could stabilize their access to resources, and enhance yields.

Solving a single aspect, say bringing inputs to the farm, will not be sufficient as credit is also needed. But credit can only be provided if sufficient likelihood exists that loans will be repaid. Here, insurance can help. If insurance of the loan makes it attractive enough for the lender, a package can be composed of inputs, with credit and insurance, that solves all these problems with one bundle. Yet, the households will remain exposed to some risks as insuring against all is prohibitively expensive. What is the appropriate degree of insurance in such bundles? That is the core question addressed in this research. It aims at supplying inputs to farmers on credit, with insurance, in such a way that a good balance is found between the benefits and risks to the farmers and the profits and risks to the credit provider.

We investigate the possibilities for such a balanced approach in Kenya and Zambia in collaboration with a large insurance provider and a farmers organisation. Together with them we collect information on the costs, benefits and risks involved in using the inputs, the alternatives open to them, and the costs and benefits involved in providing credit to finance the purchase of inputs, with and without an insurance against crop failure.

With all this information, we go and talk to the stakeholders concerned to find out how they would respond if more or less insurance would be provided. Will credit suppliers lower their prices, if repayment of loan is more likely because the crop is insured? Will households decide to take higher yielding (but more risky) crops if part of the downside risk is insured? We establish this for the parties concerned in Kenya and Zambia, but also in other African countries.

Having established how these stakeholders respond to changes in insurance, we can proceed to derive what the best degree of insurance might be. And this is then finally tested in a field experiment.

With this knowledge we can help other suppliers of insurance and credit, and farm organisations to establish similar packages that are adapted to the local conditions for input supply, and financial services.

Planned Impact

Our impact plan is structured around eight key objectives, which will be achieved through cost-effective engagement activities that are targeted to specific beneficiaries in order to maximize potential impacts of our research on practice, policy and academia. The primary beneficiary is the group of smallholder farmers in low-income countries. They are expected to benefit from improved insurance products that yield high agricultural productivity. In the long run, the families and communities of direct users will also gain. Among practitioners and policy-makers, the project will encourage key stakeholders in the agricultural value chain to collaborate together towards increasing the provision of improved bundled financial products, and to introduce policy changes conducive to innovation.

Thus, the first steps in our impact plan are to build awareness and secure commitment of stakeholders. To this end, we will hold an initial workshop with stakeholders at the start of the project in Kenya and in Zambia with the aim of achieving greater ownership of project objectives and co-production of knowledge, leading to higher likelihood of implementation success. For cost-effectiveness purposes, we will undertake these activities during the same visit planned for project launch in the two countries. The target beneficiaries are: farmers' associations; insurance companies; MFIs; financial institutions; NGOs; national and local governments; agriculture input providers; agri-businesses; weather station officers; environmental and climate change organisations; journalists; policy-makers; universities and research institutes; Kilimo Salama; ZNFU. Press news will be released in local media, and a dedicated project website will be publicly accessible and regularly updated. This website will be inbuilt in existing NRI/WUR website facilities.

Great emphasis is placed on building capacity within our local partner institutions through co-production of research design from the proposal developmental stage and then through training in survey design, research methodology and analysis. Most importantly, capacity will be strengthened through intensive personal interactions taking place during fieldwork whereby our Northern researchers will be working alongside our Southern researchers. Co-authorship of journal papers and conference presentations are also planned. In addition, we will encourage strong collaboration and mutual capacity building between partners in Kenya and Zambia in order to create the foundations for a lasting exchange of knowledge in the region.

Positive impacts on practitioners will lead to adoption of improved bundled financial products under better conditions. Through a series of workshops and seminars, financial institutions; MFIs; NGOs; Women's groups; insurance companies; farmers associations; input providers; agri-businesses; and extension service officers will become aware of the benefits of bundled financial products on input investment and farm productivity, and will increase their supply and demand for these improved financial products.

Policy dialogue and wider practitioners and policy-making impacts, meanwhile, are strongly aided by the support gained from the African Development Bank, which will contribute to our project significantly through facilitating engagement with African banks, policy-makers and practitioners in the field - ensuring that impacts are manifested across Africa and beyond the project lifetime. Our links to FaRMAf, an EC-funded project being led by NRI and WUR, which applies a collaborative approach involving a wide range of national and regional stakeholders including the Pan-African Farmers' Organisation and the East African Farmers' Federation, will also help. It is therefore expected that practice and policy changes conducive to adoption of innovation will occur at the local, national and regional level in the low-income countries of Africa.
 
Description The research project is still on-going. The field research is taking place in Kenya and Ethiopia. The key research activities and findings to report are: (1) We conducted randomised control trials to assess the role of insurance -against climate change such drought- on smallholders' willingness to purchase agricultural inputs -such as good quality seeds and fertilisers- in order to enhance agriculture productivity. (2) We designed a bundle insurance product and worked in partnerships with local insurance companies and input providers in order to offer this insurance product to small-holder farmers in Africa. (3) The research findings show that the provision of insurance led to (a) increase in the production of maize, sorghum, soya and sunflower; (b) higher purchase of good-quality certified seeds; (c) greater demand for agricultural labour; (d) higher purchase of fertilisers; (e) greater demand for credit; (f) high likelihood of willingness to pay for insurance when offered to farmers.
Exploitation Route The findings have been immediately useful for our partners who have been able to put them in practice in their daily business. More broadly, the findings might be of use by other practitioners and policy-makers in the region.
Sectors Agriculture, Food and Drink,Financial Services, and Management Consultancy

URL http://agricreditplus.nri.org
 
Description The project has trained about 100 local researchers and practitioners in Africa, particularly on the methods of research. We have also conducted several workshops with practitioners and policy makers to present our research findings and to discuss practice and policy implications. Our findings have helped improved practice and policy, e.g. on how to provide insurance for smallholder farmers in rural areas in Africa, through detailed understanding of the type of product design that is most suitable for poor small-scale farmers.
First Year Of Impact 2016
Sector Agriculture, Food and Drink,Financial Services, and Management Consultancy
Impact Types Societal,Economic,Policy & public services

 
Title Design of Randomised Control Trials - Impact Assessment 
Description We randomise the assignment of a free crop-insurance to 832 farmers belonging to 40 farmer groups, conditional on uptake of certain quality seeds. The seeds include improved varieties of maize, sorghum, soya and sunflower. After a lottery assigning participants to a treatment (40%) or control group, treatment subjects are awarded a free insurance on the land they farm using certified improved seeds. If they do not buy any improved seeds they do not get the insurance-even if they have won the lottery. Of 832 farmers correctly reached by the intervention, 366 won the insurance lottery and 466 did not. Table 1 shows that the randomization worked as expected; there are no significant differences across the two groups. The main objective of the project is to see to what extent the presence of free insurance increases the appeal of improved seed varieties (conditional crowding-in) as well as other inputs (unconditional crowding-in), and to what extent this leads to different farming decisions and outcomes. It is possible to conduct an intention to treat (ITT) analysis, taking all lottery winners as if they had indeed benefitted from the insurance and vice versa (as the insurance is conditional on purchasing quality seeds, this is not necessarily the case). This will yield conservative estimates of the impact. It is also possible to conduct LATE and TOT estimates. By design, it is expected that the presence of insurance may induce some farmers that otherwise would not have purchased improved seeds do to so. Indeed, 434 farmers purchased at least one packet of quality seeds: 46% of the control group and 59% of treatment. The difference in uptake may mean that "worse" farmers are taking up improved seeds that they would not otherwise have purchased. This may downwardly bias the estimates with respect to average productivity and income when comparing these two groups. To measure this effect, in 28 out of 40 farmer groups we also provided a random subsample of control farmers a surprise lottery (40%) in case they had previously decided to purchase quality seeds independently of the project. The insurance is based on the amount of seeds purchased within three days after participation to the surprise lottery, allowing everybody to increase the amount of packets purchased regardless of its outcome. This allows for differences in total input purchases between surprise lottery winners and losers. In total 228 free crop insurances conditional on quality seeds were awarded. Inputted by Professor Ana Marr 
Type Of Material Model of mechanisms or symptoms - human 
Provided To Others? No  
Impact Table 1. Summary statistics by lottery outcome Variables Lost N Lost Mean Won N Won Mean ? Age 455 46.215 358 45.617 0.598 Female 466 0.908 366 0.904 0.003 Education 466 6.328 366 6.470 -0.142 HH size 466 5.652 366 5.751 -0.099 Income generating members 466 2.167 366 2.164 0.003 Mpesa account 466 0.811 366 0.836 -0.025 Bank account 466 0.253 366 0.290 -0.036 Plan to borrow 466 1.3e+04 366 1.3e+04 -570.729 Land under 4 crops in study 466 3.798 366 3.809 -0.010 Total land (acres) 466 9.485 366 9.232 0.253 Produced maize last year 466 0.989 366 0.973 0.017 Produced sorghum last year 466 0.067 366 0.087 -0.021 Produced sunflower last year 466 0.021 366 0.014 0.008 Produced soya last year 466 0.006 366 0.011 -0.004 Likely drought 466 0.442 366 0.415 0.027 Likely excessive rain 466 0.247 366 0.311 -0.065* Likely pest 466 0.685 366 0.678 0.007 Risk game investment 466 59.227 366 64.809 -5.581 Openness 466 0.003 366 -0.004 0.006 Conscientiousness 466 -0.027 366 0.034 -0.061 Extraversion 466 0.018 366 -0.023 0.040 Agreeableness 466 0.001 366 -0.001 0.003 Neuroticism 466 0.021 366 -0.027 0.048 * p < .05, ** p < .01, *** p < .001. The main objective of the project is to see to what extent the presence of free insurance increases the appeal of improved seed varieties (conditional crowding-in) as well as other inputs (unconditional crowding-in), and to what extent this leads to different farming decisions and outcomes. It is possible to conduct an intention to treat (ITT) analysis, taking all lottery winners as if they had indeed benefitted from the insurance and vice versa (as the insurance is conditional on purchasing quality seeds, this is not necessarily the case). This will yield conservative estimates of the impact. It is also possible to conduct LATE and TOT estimates. By design, it is expected that the presence of insurance may induce some farmers that otherwise would not have purchased improved seeds do to so. Indeed, 434 farmers purchased at least one packet of quality seeds: 46% of the control group and 59% of treatment. The difference in uptake may mean that "worse" farmers are taking up improved seeds that they would not otherwise have purchased. This may downwardly bias the estimates with respect to average productivity and income when comparing these two groups. To measure this effect, in 28 out of 40 farmer groups we also provided a random subsample of control farmers a surprise lottery (40%) in case they had previously decided to purchase quality seeds independently of the project. The insurance is based on the amount of seeds purchased within three days after participation to the surprise lottery, allowing everybody to increase the amount of packets purchased regardless of its outcome. This allows for differences in total input purchases between surprise lottery winners and losers. In total 228 free crop insurances conditional on quality seeds were awarded. Notable impact: We trained approximately 20 local university students. Impacts included: (1) raising research capabilities among local university students; (2) acquisition of new research skills such as new research methodologies including randomised control trials; (3) capacity building of other local university researcher on state-of-the art research methodologies. 
URL http://agricreditplus.nri.org/images/documents/Publications/Designed_RCT-ESL0122351project-MARR.pdf
 
Title Baseline Database - Kenya 
Description Baseline Database - Kenya country case 
Type Of Material Database/Collection of data 
Provided To Others? No  
Impact For the collection of this baseline database, we, the research team, trained about 20 Kenyan students on the techniques of implementation of surveys, pilot studies, data collection, interview techniques, liaison with smallholder farmers. The impact resulting from the development of this database included: (1) raising research capabilities among local (female and male) students in Kenya; (2) acquisition of new research skills of these students; (3) capacity building of other research staff within the local university. 
URL http://agricreditplus.nri.org/images/documents/Publications/Designed_RCT-ESL0122351project-MARR.pdf