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Design and rating of risk-contingent credit for balancing business and financial risks for Kenyan farmers

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  • Apurba Shee
  • Calum G. Turvey
  • Liangzhi You

Abstract

Weather-related agricultural risks and limited access to credit are serious impediments to agricultural productivity and growth in developing countries. This paper describes a novel insurance linked credit model piloted in Kenya, where insurance markets are effectively absent, and farmers do not borrow because of the risk of losing their collateral. One of the challenges in deigning bundled credit products, in the absence of traded securities, is the actuarial pricing and risk rating of the insurance and the loan product. We develop a rainfall linked risk-contingent credit that transfers drought risk related perils from borrower to lender via insurance mechanism that provide a balance between business and credit risks for smallholder farmers. We describe the methodology used to design and rating of a risk-contingent structured operating agricultural credit instrument using CHIRPS rainfall data from 1981–2016 in Kenya. We illustrate the use of Monte Carlo methods to risk modelling that can be integrated within the general insurance and credit rating framework. The innovative design and methodology presented in this paper are as important as the product delivery mechanism and will be of interest to specialists in development economics and agricultural finance.

Suggested Citation

  • Apurba Shee & Calum G. Turvey & Liangzhi You, 2019. "Design and rating of risk-contingent credit for balancing business and financial risks for Kenyan farmers," Applied Economics, Taylor & Francis Journals, vol. 51(50), pages 5447-5465, October.
    • Handle: RePEc:taf:applec:v:51:y:2019:i:50:p:5447-5465
    DOI: 10.1080/00036846.2019.1613502
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    References listed on IDEAS

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    1. Apurba Shee & Calum G. Turvey, 2012. "Collateral-free lending with risk-contingent credit for agricultural development: indemnifying loans against pulse crop price risk in India," Agricultural Economics, International Association of Agricultural Economists, vol. 43(5), pages 561-574, September.
    2. Benjamin Collier & Ani L. Katchova & Jerry R. Skees, 2011. "Loan portfolio performance and El Niño, an intervention analysis," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 71(1), pages 98-119, May.
    3. Gin, Xavier & Yang, Dean, 2009. "Insurance, credit, and technology adoption: Field experimental evidencefrom Malawi," Journal of Development Economics, Elsevier, vol. 89(1), pages 1-11, May.
    4. Christopher Barrett & Michael Carter & Peter Little, 2006. "Understanding and reducing persistent poverty in Africa: Introduction to a special issue," Journal of Development Studies, Taylor & Francis Journals, vol. 42(2), pages 167-177.
    5. Dean Karlan & Ed Kutsoati & Margaret McMillan & Chris Udry, 2011. "Crop Price Indemnified Loans for Farmers: A Pilot Experiment in Rural Ghana," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 78(1), pages 37-55, March.
    6. Apurba Shee & Calum G. Turvey & Joshua Woodard, 2015. "A field study for assessing risk-contingent credit for Kenyan pastoralists and dairy farmers," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 75(3), pages 330-348, September.
    7. Sommarat Chantarat & Andrew G. Mude & Christopher B. Barrett & Michael R. Carter, 2013. "Designing Index-Based Livestock Insurance for Managing Asset Risk in Northern Kenya," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(1), pages 205-237, March.
    8. Abhijit Banerjee & Esther Duflo & Rachel Glennerster & Cynthia Kinnan, 2015. "The Miracle of Microfinance? Evidence from a Randomized Evaluation," American Economic Journal: Applied Economics, American Economic Association, vol. 7(1), pages 22-53, January.
    9. Santos, Paulo & Barrett, Christopher B., 2011. "Persistent poverty and informal credit," Journal of Development Economics, Elsevier, vol. 96(2), pages 337-347, November.
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    Cited by:

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    3. Möllmann, Johannes & Buchholz, Matthias & Kölle, Wienand & Musshoff, Oliver, 2020. "Do remotely-sensed vegetation health indices explain credit risk in agricultural microfinance?," World Development, Elsevier, vol. 127(C).
    4. Alain de Janvry & Élisabeth Sadoulet, 2023. "Seven propositions to support and finance the agricultural sector in sub-Saharan Africa in the context of climate change WP324," Working Papers hal-04123941, HAL.
    5. Alain De Janvry & Elisabeth Sadoulet, 2023. "Sept propositions pour soutenir et financer le secteur agricole en Afrique subsaharienne dans le contexte du changement climatique WP324," Working Papers hal-04123925, HAL.
    6. Balana, B. B. & Mekonnen, D. & Haile, B. & Hagos, Fitsum & Yimam, S. & Ringler, C., 2022. "Demand and supply constraints of credit in smallholder farming: evidence from Ethiopia and Tanzania," Papers published in Journals (Open Access), International Water Management Institute, pages 159:106033..

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