Financial products to improve agricultural outcomes and food security
Smallholder farmers sometimes have trouble getting loans, as they are judged by lenders to be too risky. Pilot projects in Africa suggest that weather index-based crop insurance not only helps farmers manage certain risks, but in doing so helps them get loans. This in turn allows more investment in agricultural inputs, and results in higher returns. For example, through Kilimo Salama, agro-dealers in Kenya enroll farmers for microinsurance with mobile phones right when they purchase products, such as a bag of seeds. If rainfall requirements for a given crop are not met, farmers automatically receive claim payment in their M-PESA mobile money accounts.
Specialized savings products help farmers to manage their cash flow. Malawian farmers who were offered savings accounts and special commitment savings products saved more and invested more in agricultural inputs. Compared with farmers not offered the accounts, their crop outputs in the next year’s harvest were 22% higher, post-harvest household expenditures 17% higher, and food consumption 10-25% higher.
Warehouse receipt systems in Uganda and Tanzania allow smallholder famers to store their crops in special warehouses, whose managers sell at the most advantageous prices. Some systems also enable famers to take loans or credit against the value of the crop before actual sale. By 2013, more than 500,000 African small farmers will have increased their production and earnings through such systems supported by the United Nations World Food Programme’s Purchase for Progress (P4P) initiative. Other warehouse financing programs are also helping to address the agricultural financing gap.