New data explores financial risk management in African agriculture

The ability to manage financial risk is especially important for people earning their living through agriculture.

Many farmers only get paid once or twice annually, and households need to stretch their earnings across the year by saving or borrowing money.

Price fluctuations, extreme weather, and crop or livestock diseases threaten their livelihoods.

Households engaged in agriculture may thus benefit from formal financial services, which can facilitate farm investments and make it easier to manage financial emergencies.

In the latest World Bank working paper they explored how adults who rely on growing crops or raising livestock as their household’s main source of income manage financial risk and use financial services.

They do so by analyzing data from a new module on agricultural risk management added to the 2017 Global Findex questionnaire in 15 lower-middle- and low-income Sub-Saharan African economies.

Data are based on a nationally representative survey of about 1,000 adults in each economy and reported averages are population weighted. Here are three key findings:

  1. A third of surveyed adults rely on agriculture by growing crops or raising livestock as the main source of their household’s income (map 1). Ethiopia has the highest share at 63 percent. Mali is a close second at 55 percent. In Malawi, Mozambique and Tanzania, about 40 percent of adults reported agriculture to be their household’s main source of income, followed by about a third to a quarter of adults in most other economies.

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  1. About two-thirds of these adults reported that their household experienced a bad harvest or significant loss of livestock in the past five years, and most bore the entire financial risk on their own (figure 1). Fewer than 1 in 10 adults living in these households reported that their household received any compensation – such as through an insurance payout or government assistance — for their losses.
  1. Use of crop or livestock insurance is low (figure 2). Insurance is one way for households to manage the financial risk of a bad harvest or loss of livestock and to receive a potential payout in the case of a loss.

However, insurance take-up is low across surveyed economies. On average, 5 percent of adults living in households engaged in agriculture as the main source of income reported that their household has gotten any crop or livestock insurance in the past five years.

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How can we increase the ability of agricultural households to manage financial risk?

Governments and the private sector can offer schemes that bundle existing farm subsidies with insurance to encourage agricultural households to adopt such products.

The World Bank’s Global Index Insurance Facility — which facilitates financial access for smallholder farmers through the provision of catastrophic risk transfer solutions and index-based insurance in developing economies — documents some of such efforts.

For example, in Zambia, the government offered crop-yield insurance with seeds and fertilizers allowing nearly 1 million farmers to gain access to insurance in the season ending in March 2019.

Saving and credit are two other key ways to manage financial risk. Accounts provide the foundation for doing so: they provide a safe place to store money and build savings.

Accounts also make it easier to access credit from a formal financial institution, receive or make payments, and pay bills.

In the paper they [World Bank] cross-tab their new data on financial risk management in agriculture with data on use of financial products from the Global Findex questionnaire.

They find that most adults in agricultural households lack the financial tools — such as accounts, savings, and credit — that could help them manage financial risks.

One way to help these adults get access to formal financial services is to increase the use of digital payments in agricultural supply chains.

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Digitizing payments for the sale of agricultural products is a proven way of increasing account ownership.

According to the 2017 edition of the database, 40 million adults with an account in developing economies opened their first one to receive payments for the sale of agricultural products.

World Bank’s new working paper is available here and a note based on working paper here. The full methodology is posted at the Global Findex homepage.

While this paper focuses on Sub-Saharan Africa, agricultural risk management data is also available for a few economies outside the region.

Paper citation:

Klapper, Leora, Dorothe Singer, Saniya Ansar, and Jake Hess. 2019. “Financial Risk Management in Agriculture: Analyzing Data from a New Module of the Global Findex Database.” Policy Research Working Paper 9078, World Bank, Washington, DC.

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