Abstract
AbstractWe employ a discrete choice experiment to elicit demand and supply side preferences for insurance‐linked credit, a promising market‐based tool for managing agricultural weather risks and providing access to credit for farmers. We estimate preference heterogeneity using primary data from smallholder farmers and managers of lenders/insurers combined with household socio‐economic survey data in Kenya. We analyse the choice data using maximum simulated likelihood and Hierarchical Bayes estimation of a mixed logit model. Although there are some similarities, we find that there is conflicting demand and supply side preferences for credit terms, collateral requirements, and loan use flexibility. We also analyse willingness to buy and willingness to offer for farmers and suppliers, respectively, for the risk premium for different attributes and their levels. Identifying the preferred attributes and levels for both farmers and financial institutions can guide optimal packaging of insurance and credit providing market participation and adoption motivation for insurance‐bundled credit product.
Highlights
Uninsured agricultural risk and limited access to credit are important issues in agricultural development and are considered among the sources of poverty traps in subSaharan Africa (Barrett et al, 2006; Barrett and Carter, 2013; Santos and Barrett, 2019)
Efforts to address weather-related risks and limited access to credit in smallholder agriculture have resulted in the promotion of index insurance-linked credit products in developing countries
We use a discrete choice experiment to examine demand and supply-side preferences for attributes of insurance-linked credit in Kenya, and model heterogeneity in these preferences using primary data from smallholder farmers and managers of financial institutions combined with household socio-economic survey data
Summary
Uninsured agricultural risk and limited access to credit are important issues in agricultural development and are considered among the sources of poverty traps in subSaharan Africa (Barrett et al, 2006; Barrett and Carter, 2013; Santos and Barrett, 2019). Agricultural production is affected by drought-related climate risks which are increasing in frequency and severity in the region (Daryanto et al, 2016; Lesk et al, 2016). Agricultural productivity is affected by limited access to capital that inhibits smallholder farmers’ ability to purchase and optimise agricultural inputs. The impacts of drought-related climate risks are acute in Kenya. A promising intervention, and one which forms the backdrop to this paper, is insurance-bundled credit product which links insurance directly to agricultural credit to protect both borrower and lender against specified contingent risks (Skees and Barnett, 2006; Skees et al, 2007; Gineand Yang, 2009; Carter et al, 2011; Collier et al, 2011; Miranda and Gonzalez-Vega, 2011; Shee and Turvey, 2012; Farrin and Miranda, 2015; Shee et al, 2015; Carter et al, 2016)
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