Growing Credit Access for Farming Communities through Embedded Insurance

Access to agricultural credit is improving, hitting roughly $68 billion across Africa, Asia and Latam.

A MasterCard Foundation 2019 study suggests that financial service providers are currently supplying USD 68 billion to smallholder households, with USD 21 billion from formal financial institutions, USD 30 billion from value chain actors and USD 17 billion from informal financial institutions. While the financing need is 4x this amount, the market has seen an unmistakable acceleration in technology-driven innovation and expansion of agendas, programs, and investments related to rural agricultural finance.

Financial institutions are increasingly interested in agriculture lending. This can be attributed to two major trends.

1. Policy interventions requiring local lenders to lend a certain percentage of their portfolio to agriculture. In Tanzania, Nigeria, India and China such policy interventions already exist and both private financial institutions and state banks drive such lending.

2. Positive financial incentives such as low cost and highly concessional funding provided by either government or development institutions to lend to agriculture. Key institutions include Green Climate Fund, IFAD, DEG, KFW, DFC, SwedFund, BII amongst others which are providing wholesale lending at concessional rates to an ecosystem of local lenders, value chain actors, agri techs, commercial banks as well as state banks and informal financial institutions.

However, as financial institutions increase agriculture lending, they are careful to consider the risks involved. Climate risks such as flood, drought, locust attacks or other pest and diseases could wipe out a large part of the credit portfolio. More so, in just one season most of this lending is targeting primary production, financing inputs and production costs, where production is often not irrigated, the risks are significant.

Climate risks drive most financial institutions credit risk and investment committees to require insurance to manage the institution's credit risk and as a pre-condition to disbursing any funds.

How a Agri Credit Provider Benefited from Embedding Agric Insurance

One of our clients experienced a drought but still had a 96% repayment rate that season. More so, it doubled its loan portfolio the following year in the same region.

Without insurance the financiers farmers would have likely had to drop out, causing loan officers to be forced to look for new clients which is costly and tedious. Moreso, the cost of looking for new clients far outstripped the cost of insurance.

While WITH insurance clients re-enrolled and encouraged others to join.

Embedding insurance is a clear trend as financiers grow their agriculture exposure

Pula partners with banks, MFIs, and value chain actors that lend to small holder farmers to embed insurance into their portfolios to unlock and grow financing to smallholder farmers and SMEs.

Key motivations for these organizations to partner with Pula to embed insurance are to:

1. Protect the financial service provider’s loan portfolio from climate shocks

2. Ensure farmers' ability to repay credit through a comprehensive and affordable insurance product

Few countries and financial institutions where Pula bundles insurance with credit

Benefits of Embedding Insurance

The impact of embedding insurance is that farmers are able to

1. Repay the loan for that season

2. Remain customers of the financial institution for the following season despite climate shocks

3. Growing the portfolio of the financial institutions to reach a profitable scale.

When farmers are able to repay loans following a climate shock through insurance, we see increasing evidence of farmers being able to bounce back to the income levels they were targeting with the support of the loan. Evidence from Apollo Agriculture in Kenya shows that even after two subsequent years of drought, farmers were able to attain yields that were similar to their initial target level achieved with the improved inputs supplied through Apollo’s loans. This is what we refer to as the ‘resilience effect’ or ‘bounce back effect’ of insurance.

The second is similarly important for financial institutions given that a lot of upfront cost is incurred in client acquisition and if farmers drop out after one year, this limits the growth rate of the loan portfolio which reduces the scale of the financial institutions operations, and therefore limits the profitability of agricultural loan portfolios, which like any other require scale to operate. Apollo agriculture grew it’s portfolio year on year, despite climate shocks such as flood and drought.

Pula’s key learnings about the requirements for lenders to successfully embed insurance

Given agriculture lenders pain points, insurance products need to be tailored to the lenders specific list of requirements. While these requirements can differ many lenders to agriculture face similar challenges and Pula, as a technical service provider of climate insurance, has developed a unique expertise in tailoring insurance products for financial institutions.

We have found that our parametric insurance product - the area yield index - is particularly suited to serve financial institutions because of:

1. Its wide ranging coverage both in terms of risks and crop value chains

2. The flexibility to structure the product for each institution including both payment timelines and coverage terms

3. Provide an insurance product at an affordable and simple to understand price.

Services provided by Pula to enable agriculture lending

At Pula we are keen to work with financial institutions looking to grow their agricultural loan books, and contribute to ensuring food security.

Through our commercial, actuarial, technical support, and consulting and product development teams, we are ready to support financial institutions to engage in agricultural finance and insurance through a range of services:

• Our consulting and product development team can support in developing the business case, manuals, processes and products for agricultural lending and embedded insurance. Often such work is supported by international development agencies, INGOs and UN agencies

• Our commercial and technical support teams based in 19 African and Asian markets are ready to support lenders to develop crop insurance solutions that can protect the loan books of the financiers along the value chain.