Farmers' Adoption of Improved Practices: The power of INTEGRATED FINANCE


Substantial efforts have been put to mitigate climate change through the utilization of climate-friendly technologies and practices, such as Good Agricultural Practices (GAPs), aiming at reducing GHG emissions (Wrefort 2017). GAPs do not only promote climate change mitigation and adaptation (FAO 2017), according to Hobbs (2003, p.iii) they also improve the sustainability of agriculture “on a number of fronts, including protecting environmental and natural resources, improving food quality and food safety and enhancing food security through improved production techniques. (…) GAPs may provide the catalyst for improvements to production techniques and to supply chain infrastructure (e.g. processing, storage, transportation) in developing countries”. GAPs can also increase farmers’ revenue and reduce production costs (Hobbs 2003). However, despite a number of economic, regulatory, legal and human capital incentives, GAPs’ adoption remains low (Hobbs 2003, Wrefort 2017). In fact, farmers face numerous constraints in order to adopt GAPs, such as the need to invest in assets, potential higher production costs, weak institutional infrastructure to implement and monitor GAPs, as well as illiteracy (Hobbs 2003).


Facilitating access to rural finance and microfinance is a prerequisite to invest in the assets needed for GAPs’ adoption, which in turn is likely to increase agricultural productivity and profitability (Chloupkova & Bjønskov 2002). Indeed, scholars found that smallholder farmers’ financial environment conditions their investment decisions (Karlan et al. 2014) and that “awareness, access to credit and savings had a significant influence on farmers’ farm investment” (Adams 2015, p. iv). For instance, results from Ruben and Clerex (2003) show that an agroforestry system was adopted in occidental Honduras thanks to the provision of rural credit and savings services. This innovation in turn led to higher and more stable yields. Besides that, access to rural finance (saving, insurance and credit) can have positive impacts on the improvement of access to services and life-enhancing facilities, women empowerment, the enablement of income generation and diversification, employment creation, education and the reinforcement of food security (Ruben & Clerex 2003, Afrane 2002; Mohamed et al. 2014). In 2012, Dalberg (2012) estimated at $450 billion the size of global demand for smallholder agricultural finance. With only two percent of the demand addressed, they claim that there is potential for commercial lenders.


That said, and as recognized by the FAO (2017, p. 127), “many smallholders tend to face major barriers accessing the finance needed for investment in improving productivity and adopting sustainable farming practices. They usually have limited financial literacy, collateral and credit history, and few other sources of income”. This is illustrated by Adam’s (2015, p.iv) results from Ghana, which show that “collateral requirement, late disbursement and association membership were the three most pressing constraints militating against the [Dzorwulu] vegetable farmers to access to credit”. In addition to those credit constraints the literature mentions insufficient amount of credit, high interest rates and inappropriate payback periods, which are not adapted to production cycles. De Janvry et al. (2016, p.7) propose various credit schemes’ improvements, including “customization of repayment schedules to seasonality, availability of post-harvest loans to help farmers postpone selling a harvest time and wait for better prices, flexible collateral arrangements (such as using stored crops with warehouse receipts as loan guarantees), providing lenders with information on borrowers (through a credit bureau, scoring, and fingerprinting), access to pre-approved credit lines (...), and IT services in nudging financial transactions (with for example SMS reminders to make payments on loans and saving deposits)”.


There exist various solutions, each one with its pros and cons, to supplement one of the major issues, which is the need for traditional collateral. Farmers often do not have access to financial products because they can not provide assets required by banks as collateral: livestock, land or harvest are often not enough (Chinaka 2014). It is possible to tape into existing social structures and capital and thereby rely on joint liability (Chloupkova & Bjønskov 2002). However this option involves risks such as the lack of solidarity, poor governance and conflict of interests. Conditional microcredit is a second option, where repayment conditions are dependent on the continued adoption of climate-smart agriculture practices (Engel & Muller 2016). A third option is technology and quantitative information to inform decision (Chinaka 2014), such as the blockchain and credit-scoring models, which are defined by Schreiner (2000, p. 105) as “formulae to predict risk based on the performance of past loans with characteristics similar to current loans”


Results of a study conducted in China show that farmers who are more risk averse or more loss averse adopt genetically modified Bt cotton later than those who are less (Liu 2013). Other results of a randomized controlled trial in India by Cole et al. (2011, p. 1935) show that “insurance provision induces farmers to invest more in higher-return but rainfall-sensitive cash crops, particularly among educated farmers”. This goes hand in hand with Karlan’s et al. (2014) results from an experiment conducted in Ghana, which found that insurance is a prerequisite to be able to find the necessary resources to invest in riskier crops. To sum up and although mixt evidence has been reported on the uptake and impacts of insurance (Carter et al. 2016), transferring the risks of agricultural investments in higher return technologies and riskier production choices via crop insurance can be considered as a prerequisite to the adoption of GAPs’ and improved agricultural technologies (Demirguc-Knut et al. 2017; Karlan et al. 2014) (see Figure 1 below).




Figure 1: Ideal interactions of microcredit and microinsurance (by the author)


That said, insurance doesn’t only represent a prerequisite, it is also considered as a binding constraint to the adoption of GAPs (Karlan et al. 2014). Despite a strong growth in demand for microinsurance, notably in Latin American and the Caribbean, where only 8.2% of the population were covered by microinsurance in 2017 (Microinsurance Network 2017), farmers can be reluctant to subscribe to insurance schemes because of excessive premiums reflecting high operational costs. Those are composed of the “pure risk” as well as of the administrative and implementation costs among other factors (The World Bank 2011). This explains why insurance schemes are often subsidized. From the supply-side perspective, a key constraint for a wider offer of agriculture insurance is the lack of individual data, which is a prerequisite for risk analysis and determination of the size of the insured community.


Among the existing solutions to tackle those barriers and respond to the demand, De Janvry et al. (2014) propose to sell insurance policies to groups rather than to individuals. Index insurance is another option aiming at protecting farmers against shocks such as extreme weather events. Although a number of negative income effects of index-insurance have been established (Marr et al. 2016), the benefits of index insurance, which is “based on a verifiable and independent measurement of a variable that impacts crop development” are twofold (The World Bank 2011, p.x). On the one hand, payouts are reduced because losses are covered only if due to natural events. Thereby losses due to human factors such as unsustainable farming practices are not covered. One the other hand, administrative and implementation costs are reduced because individual risk assessments and paperwork are not/less needed, which consequently makes premiums more affordable (The World Bank 2011).


However, even if an integrated finance approach is adopted or in other words if insurance and credit products are linked to create a self-sustaining solution and designed in a way that eliminate access constraints, this is not a sure recipe for success. Not only the agro-ecological and economic environments, the collateral or property rights structure (Carter et al. 2016) but also individual characteristics such as education, income, wealth (Giné & Yang 2009) as well as trust in the products (Giné et al. 2008; Karlan et al. 2014) are key influencing factors.


For example, standalone index insurance is unlikely to influence technology adoption if risk is intrinsically low or if the collateral or liability required by the microcredit contract is low (Giné & Yang 2009); it can only be effective in such environments if insurance is interlinked with credit contracts (Carter et al. 2016). Carter et al. (2016) conclude by saying that “index insurance can, in the right environment and done in the right way, serve to incentivize the uptake of improved technologies by the small-scale farming sector. It is not, however, a panacea for all environments, and will certainly be ineffective if too much of the risk is idiosyncratic or if the index itself is poorly designed and fails to cover a substantial amount of the risk that farm households face” (Carter et al. 2016, p. 59).


In conclusion, financial innovation has the potential to mitigate the impacts of uninsured production risk (Cole et al. 2011) and enhance investment in activities with high-expected profits, such as the adoption of GAPs and related technology. Regarding insurance products, causal relationships should be explored, notably between risk aversion, education, trust and demand for insurance. The role of other risk mitigation strategies, that can complement or substitute index insurance should also be investigated (Marr et al. 2016). Moreover the comprehensive approach of integrated finance, which links microcredit and microinsurance contracts, should be further studied, by looking at the life cycle of smallholder farmers and offering products that are viable and serve farmers’ interests. There is a need to examine the synergies between credit and insurance suppliers and determine the preferences of farmers in terms of interlinked financial products (Marr et al. 2016). Finally, in order to design successful products, the interactions between risks, pricing, demand and development outcomes need to be studied (Marr et al. 2016; Demirguc-Knut et al. 2017).


Furthermore, in addition to said products, a truly integrated approach requires an active collaboration between insurers and their risk communities. Rather than using data solely to price and adapt insurance coverages, lessons learned from data and statistical analysis should be used to aid communities in adopting new practices, which reduce their initial risk, thereby increasing the financial margins of the insurance coverage (the financial reserves, which stabilize the sustainability of the product) and /or facilitating insurance premium reduction.


Thanks to LAKE Finance International for their work in developing the concept of integrated finance and their contributions to this article.






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