Was talking to a smallholder farmer in rural Kenya. He took a loan from a local bank to do maize (corn). Unfortunately the crop failed. The Bank is on his neck.
do you think there could be a better way to design these loans to smallholder farmers so that financial tools like loans, meant to empower them do not turn out as torment.
Hi, John
Kenyan politicians have always advocated insurance against extremities in activities such as farming as well as for pastrolists with animals and so the loans may be insured which obviously increases the cost of farming. Weather is a natural risk that can lead to crop failure so in the sensitivity planning one ought to address this. Remember insurance is also a business and cannot provide charity to farmers when they fail because of weather or bad farming practices. Ultimately farmers must see farming as a profession and a business and all the businesses and professional standards must be adhered to. What happens when a Boeing air craft fails? They use business standards to recoup their losses. Farmers may also consider moving out if farming business has higher risks. Britain moved out of manufacturing and Sweden decamped from lucrative ship building that were a pillar to their economies and turned industrial sheds and ship yards to theme parks and tourist fields. Life is still good in these countries.
Therefore designing the loans to cater for failure means free lunch. I don't know how econometrics can put in mitigating variables and in other parts of the world where the governments encourage farming to occupy its citizens from laziness , have actually subsidized them. In other words stimulus packages and social welfare without conditions can be factored at the design stage.
Best wishes and a prosperous new year.
Erick Outa
In the context of India - two things happen - one when the crop fails and the loan is form institutional sources, government bails out farmers by scraping the loans. If it is through the local money lender who charges exorbitant rates of interests, farmers loses out part or whole of his land eventually. Farmer suicides are partly a result of such market failures at the grassroots levels where financial markets do not function. well. Strengthening rural financial institutions including provision of insurance options is key for helping the farmers who face frequent crop failures. This attached paper may help.
Article Rural Financial Policies for Food Security of the Poor: Meth...
Suresh Babu provides the exact picture of what happens when a smallholder faces crop failure. I don't think it is unique to India that the farmer would have to loose the land or other property to pay off the loan. Where it is a bank loan, the bank can reschedule the payments by providing another loan, but that depends on the type of crop and the nature and frequency of the failure (eg. if it is an exceptional flood or draught). Insurance could be an option but unregulated insurance involves more risk than security. It is more likely that in case of a large scale failure the private insurance company will not pay out. Smallhoders are not organized or powerful to resort to legal means against private insurance companies. One feasible option would be to integrate insurance within the loan package, the way regular commercial banks in most western countries does. In that way, the borrowers' installments will go a little higher, but it will save her in case of a disaster.
The only example I know in South America about your subject is this paper: "Providing Cost-effective Credit to Small-scale Single-Crop Farmers: The Case of Financiera El Comercio", it is a case about Paraguay, quite a good one. Authors are Wittlinger, B. & Tuesta, T.; Microfinance Gateway,
Regards
Gustavo Concari
in country like India, government announce several policies to solve a single issue or problem. but the problem still remains due to lack of publicity and awareness among people for whom such steps were taken. government of India announced many agricultural insurance schemes so that it will help farmers if crop fail. my point is that if farmers have insurance scheme then it will help to recover the bank loan... but due to unawareness, some farmers choose the evil one- suicide.
While the policies may be good on paper, their implementation has a lot to be improved. Insurance may partly offset and waivers are more political, pre-election stunts. Diversified cropping and having multiple sources of Income are the only two ways to cushion the impact. Governments need to intervene to stop banks from getting aggressive on collections/recovery. .
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