Optimal Packaging of Insurance and Credit for Smallholder Farmers in Africa

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.

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.