Skip navigation

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

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

Shee, Apurba ORCID: 0000-0002-1836-9637, Turvey, Calum G. and You, Liangzhi (2019) Design and rating of risk-contingent credit for balancing business and financial risks for Kenyan Farmers. Applied Economics. ISSN 0003-6846 (Print), 1466-4283 (Online) (In Press) (doi:https://doi.org/10.1080/00036846.2019.1613502)

[img] PDF (Author Accepted Manuscript)
24056 SHEE_Design_and_Rating_of_Risk-Contingent_Credit_2019.pdf - Accepted Version
Restricted to Registered users only until 8 November 2020.

Download (1MB) | Request a copy

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 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.

Item Type: Article
Uncontrolled Keywords: Kenya, bundled credit, risk rationing, agricultural weather risk, risk modeling
Subjects: S Agriculture > S Agriculture (General)
Faculty / Department / Research Group: Faculty of Engineering & Science
Faculty of Engineering & Science > Natural Resources Institute
Faculty of Engineering & Science > Natural Resources Institute > Food & Markets Department
Last Modified: 16 May 2019 16:09
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
Selected for GREAT 2019: GREAT 6
URI: http://gala.gre.ac.uk/id/eprint/24056

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics