Unlocking Smallholder Credit: Does Credit-Linked Agricultural Insurance Work?

Governments and donors have introduced many programs and policies designed to increase lending to the agricultural sector generally, and to small farmers specifically. In spite of these efforts, it is widely believed that the sector and smallholders continue to be credit constrained so they miss opportunities to adopt productivity-enhancing projects requiring greater cash outlays but offering the prospect of higher yields and farm incomes. This problem has sparked renewed interest in using agricultural insurance to reduce the risk for farmers of adopting new technologies and production practices and, thereby, reducing default risks for financial service providers (FSPs) so they will invest in developing sustainable methods to serve agriculture. This paper reviews possibilities for, and experience with, credit-linked crop insurance, including different types of insurance and credit arrangements, ranging from insurance sold to individual farmers to meso insurance sold to FSPs to cover losses suffered by farmer borrowers. The paper describes the main methods of linkage that are being tested or proposed, identifies the critical features of each method, and discusses the advantages and limitations for the three parties – farmers, FSPs, and insurers.