Microfinance and Agriculture: Could an Insurance Scheme Fill the Gap Between the Need of Access to Credit for Small Farmers and a Better Security of Being Reimbursed for the MFI?

This paper explores the following themes:

• What products related to agriculture could be considered/ rejected?
• How to organize the insurance scheme?
• Does it reduce the vulnerability of farmers?

The paper provides reasons why insurance companies give difficult access to insurance companies in rural areas, especially to small farmers. These include:

• Lack of information leading to moral hazard and adverse selection;
• Lack of collaterals;
• Covariant risk;
• Costly administration
• More risk than in other sectors.

As per the paper, some of the ways to deal with risks in rural areas, including new and promising insurance products, are:

• Informal insurance arrangements;
• More formal institution for the lender, like guarantee fund, mortgage, warehouse, risk central-credit bureau, rural management board;
• Formal rural insurances, such as price insurance, livestock insurance, crop insurance;
• Access to global market for microfinance institution (MFI) or micro insurance companies through reinsurance and new market instruments for sharing risk.

The paper also explores the future of rural microinsurance, its potential as the most appropriate solution and its implementation. It concludes that:

• Better access for small farmers to microinsurance products could, to a certain degree, fill the gap between their need of access to credit and a better security of being reimbursed for the MFI;
• For many farmers, however, access to savings will be more appropriate than insurance;
• If insurance is the best solution to reduce vulnerability, then new index insurance products should be favored.