Interlinking weather index insurance with credit to alleviate market failures and improve agricultural productivity in rural Ethiopia
University of California - San Diego
University of Athens (Greece); FAO (Italy)
Craig McIntosh (US); Alexander Sarris (Greece); Shukri Ahmed, Rene Gommes (Italy)
Smallholder farmers are beset by an interlocking set of market failures. Credit, insurance, and therefore the very use of costly inputs such as fertilizer can remain underdeveloped when only one market failure can be addressed at a time. This pilot proposal seeks funds to develop a fully scaled product innovation in the provision of insured credit. Rather than addressing only a credit constraint (in which case risk rationing can remain a barrier) or insurance failures (which reverse the time-inconsistency problem and ask farmers to pay now in faith of a future benefit), we seek to test a form of insured credit. Through collaboration with Nyala Insurance of Ethiopia, already in its third year of operation as an insurer, we will seek to provide insurance through credit contracts. Local cooperatives that borrow in order to make in-kind loans of fertilizer would be the target population for the product. In years at which an index insurance mechanism indicates a payout, loans will be repaid by the insurance to the cooperatives. The innovation would be evaluated through a randomized controlled trial, and additional price variation will be injected at the individual level in order to study demand elasticities. By implementing an experiment in this new interlinked product we hope to nail down the theoretical impediments to the successful provision of index insurance as well as to pioneer a product that will serve to provide insured credit to one of the world’s most vulnerable farming populations.