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Uptake of insurance-embedded credit in presence of credit rationing: evidence from a randomized controlled trial in Kenya

Uptake of insurance-embedded credit in presence of credit rationing: evidence from a randomized controlled trial in Kenya

Ndegwa, Michael, Shee, Apurba ORCID: 0000-0002-1836-9637, Turvey, Calum and You, Liangzhi (2020) Uptake of insurance-embedded credit in presence of credit rationing: evidence from a randomized controlled trial in Kenya. Agricultural Finance Review. ISSN 0002-1466 (In Press) (doi:https://doi.org/10.1108/AFR-10-2019-0116)

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Abstract

Purpose:
Drought related climate risk and access to credit are among the major risks to agricultural productivity for smallholder farmers in Kenya. Farmers are usually credit constrained either due to involuntary quantity rationing or voluntary risk rationing. By exploiting randomized distribution of weather risk-contingent credit (RCC) and traditional credit, we estimate the causal effect of bundling weather index insurance to credit on uptake of agricultural credits among rural smallholders in Eastern Kenya. Further, we assess farmers’ credit rationing, its determinants and effects on credit uptake.

Design/methodology/approach:
The study design was a Randomized Controlled Trial (RCT) conducted in Machakos County, Kenya. 1170 sample households were randomly assigned to one of three research groups: 351 farmers assigned to receive traditional credit; 351 farmers assigned to receive RCC; 117 farmers assigned to receive RCC with subsidies on insurance premium; and 351 farmers assigned to receive no credit. This paper is based on baseline household survey data and the first phase of loan implementation data.

Findings:
We find that 48% of the households were price-rationed, 41% were risk-rationed and 11% were quantity-rationed. The average credit uptake rate was 33% with the uptake of bundled credit being significantly higher than that of traditional credit. Risk rationing seems to influence the credit uptake negatively whereas premium subsidies do not have any significant association with credit uptake. Among the socio-economic variables, training attendance, crop production being the main household head occupation, expenditure on food, maize labour requirement, hired labour, livestock revenue and access to credit are found to influence the credit uptake positively whereas the expenditure on non-food items is negatively related with credit uptake.

Research limitations/ implications:
Our findings provide important insights on the factors of credit demand. Empirical results suggest that risk rationing is pervasive and discourages farmers to take up credit. Our results also imply that credit demand is inelastic in our study sample although relatively small sample size for RCC premium subsidy groups may be a limiting factor of our estimation.

Originality/value:
By implementing a multi-arm RCT we estimate the factors affecting the uptake of agricultural credits along with eliciting credit rationing among rural smallholders in Eastern Kenya.

Item Type: Article
Uncontrolled Keywords: risk-contingent credit, index insurance, credit rationing, credit uptake, bundled insurance
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: 30 Jun 2020 14:24
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
Selected for GREAT 2019: None
Selected for REF2021: None
URI: http://gala.gre.ac.uk/id/eprint/28114

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