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Adoption and impact of index-insurance and credit for smallholder farmers in developing countries: A systematic review

Adoption and impact of index-insurance and credit for smallholder farmers in developing countries: A systematic review

Marr, Ana, Winkel, Anne, van Asseldonk, Marcel, Lensink, Robert and Bulte, Erwin (2016) Adoption and impact of index-insurance and credit for smallholder farmers in developing countries: A systematic review. Agricultural Finance Review, 76 (1). pp. 94-118. ISSN 0002-1466 (doi:10.1108/AFR-11-2015-0050)

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Abstract

Farmers in most developing countries are mainly smallholders, with average farm size of 1-2 hectares. They tend to be constrained in investing in productivity-enhancing technologies because of limited household resources combined with lack of access to external finance on which they depend (Tadesse 2014). Smallholders often do not have access to credit provided by banks or special rural credit institutions. One of the constraints on such lending is the limited amount of collateral to securitize the repayment of the loan. This means that banks will have little recourse against defaulting borrowers. As a result, high-return economic cropping activities that typically require significant up-front investments (e.g. enhanced seeds and fertilizers) may be hampered by these credit constraints (Boucher et al., 2008).

Provision of insurance can encourage higher supply of credit, both the implied demand for credit and supply thereof, and thus enhance agricultural inputs use. However, there is a lack of growth due to underdeveloped and imperfect markets for inputs, insurance and credit (Carter and Barrett, 2006; Cole et al., 2012) causing among others credit rationing. In the environment of underdeveloped and imperfect markets, a combined approach is needed (Alderman and Haque, 2007), as separate access to each of these is seriously restricted.

More insight into the impact of linking insurance and credit is needed since there is limited information in the literature regarding the potential effect of bundling insurance and credit, for example on the extent to which insurance would reduce the cost of borrowing and make credit more accessible to the smallholder farmers (Tadesse et al., 2015). In this paper we review the most recent scientific literature on one specific form of insurance: index-insurance. As is well known; important advantages of index insurance are low administrative costs and the elimination of moral hazard. An important disadvantage is basis risk (see below). In this review paper we discuss the determinants of demand for index-insurance, the impact of index-insurance on smallholder livelihoods, and the existing links between index-insurance and credit. In this meta-analysis, we identify key discoveries on the potential of index-insurance in enhancing credit supply for smallholders and thus farm productivity. We focus on index-based insurance products since it offers a tentative potential for coping with losses in lower income countries (Skees, 2008).

Item Type: Article
Uncontrolled Keywords: Credit, Insurance, Agriculture, Smallholders
Faculty / Department / Research Group: Faculty of Engineering & Science > Natural Resources Institute
Faculty of Engineering & Science > Natural Resources Institute > Development Studies Research Group
Faculty of Engineering & Science > Natural Resources Institute > Food & Markets Department
Last Modified: 04 May 2018 00:38
Selected for GREAT 2016: GREAT a
Selected for GREAT 2017: None
Selected for GREAT 2018: None
URI: http://gala.gre.ac.uk/id/eprint/15085

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