Can financial innovations be structured to address climate risk of smallholder farmers?

  • Patricia RICHTER, ILO
  • Zacchaeus I. SYENGO, Rafiki Kenya
  • Jerry SKEES, GlobalAgRisk
  • Jonathan N. AGWE, IFAD


Patricia RICHTER started the session by highlighting the three main topics: financial innovation, climate change and smallholder farmers. She provided an example of the typhoon Haiyan, showing how disasters, but also slow environmental degradation, can affect millions of people due to climate change. She concluded with a short quiz, asking the audience whether they thought they would be somehow affected by climate change. Richter then asked how many insurance products audience members have, and questioned them on whether these products would help them address climate change risks.

The session continued with the presentation of Zacchaeus SYENGO of Rafiki Kenya. He introduced what climate change means to the smallholder farmers and explained that farmers are more frequently exposed to unpredictable climatic conditions, resulting in huge losses due to disease, drought and floods. This, in turn, leads to food insecurity and increased rural-urban migration, stunting rural economic development. However, it is important to note that almost 60% of the food produced globally comes from smallholder farmers. Syengo continued by profiling the typical smallholder in Kenya. The average age of a smallholder farmer is about 45 - 60 years and male. They often have less than five acres of land. Syengo stressed this group's aversion to change, which is reflected in the slow adoption of new technology, farming methods, and better inputs. The literacy and income levels, on average, are low, holding back quicker delivery of emerging knowledge on farming.

Syengo then showed the interventions by the Rafiki Bank to minimize risk. He also mentioned the importance of trust in order to have an impact. This was covered through strategic partnerships with organizations that deliver technical know-how, buy down risk or provide market linkages. He provided the examples of SNV Kenya in dairy, Syngenta Foundation for horticulture, and Amiran on modern smallholder farming technology and inputs. Another way to build trust is by providing insurance, but the most important issue is the cost of insurance and the low financial literacy of the client, which decreased the trust in such products. Syengo provided the example of a partnership with Seedco/Agrovet, Safaricom and UAP Insurance Kenya, in which insurance worked for smallholders. Insurance can provide comfort and faith in farming to smallholder farmers, as they are able to recover again from shocks. He concluded with some risk-minimizing mobile apps that provide real time information to farmers, providing more opportunities to the rising population of young farmers in Kenya.

The session continued with the presentation of Jonathan AGWE. He introduced IFAD's work in inclusive rural financial services, with approximately 17% of IFAD's portfolio (USD $1,148 million) dedicated to rural finance. Agwe stressed that climate change is impacting food security and tropical regions are the most vulnerable to climate change. Decreases in crop yields are more likely than increases, even with only moderate warming in both tropical and temperate regions. Adaptation to climate change is important but needs to be context-specific. Agwe presented data from AGRA's Africa Agriculture Status Report 2014 on the projected loss of suitable arable land by 2050 due to changes in soil composition and raised the question of whether agricultural insurance is a probable risk transfer tool. Agwe showed that the use of weather-related insurance is on the rise, but raised the question - who is best responsible for this tool: the government, the private sector or a combination?

He then showed the probability of a failed maize crop in Kenya. If a drought strikes in drought-prone areas, the chances of a failed season are 40 - 100%. He presented the policies of the Kenyan government, consisting of ex-ante and ex-post policy measures. Ex-ante policy measures included subsidized agricultural inputs, extension services and fiscal planning, such as catastrophe funds and weather risk insurance. The ex-post policy measures include relief support and building up resilience capacity of farmers. Agwe noted that during the latest crop failures in Kenya, only 1.7% of the total losses were covered through relief support. He then turned to question whether agricultural insurance can be a cost-effective risk transfer tool in Kenya. He answered that insurance is not the silver bullet, but only one of several innovations in inclusive rural financial services. Agwe concluded that the Kenyan government is establishing a dedicated Agricultural Risk Management Agency (ARMA) to prepare a national plan and strategy for agricultural insurance, which coordinates government priorities for agricultural development and insurance and channels government support to the private sector insurers.

Jerry SKEES of GlobalAgRisk presented his view on agricultural insurance based on more than 30 years of experience. Before continuing his presentation, he referred to teleconnections, which are global climate patterns around the world that create extreme local climate shocks, such as El Niño. Teleconnections provide challenges for agricultural insurance for smallholders in low and middle income countries. They cause weather externalities to return in a pattern, which leads to classic insurance problems, such as moral hazard and adverse selection. Other problems with agricultural insurance revolve around lack of data, high delivery costs, and limited demand. Index Insurance has not proven to be the answer for smallholder farmers, mostly because of the basis risk, limited demand and limited scale up opportunities. Skees noted that until more progress is made in addressing key challenges, having smallholder farmers purchase insurance may not be the right answer.

Skees pointed out that disasters create problems with access to finance and credit contraction. He presented a study which showed that a 1% increase in population affected by disasters yields a 1.1% decline in access to credit in the following year. Furthermore, liquidity problems spill over to the following year and capital problems spill over to the following two years. Demand for credit increases and supply is reduced, leading to increased costs and capital volatility. He then turned to Financial Disaster Risk Management, showing that different financial innovations are suitable, depending on the risk. Frequent and less severe events should be covered by savings, while moderate frequency and severity should be covered by credit. Rare but high-impact events should be covered by disaster risk transfer. Reducing consequences of catastrophic natural disasters has the potential to increase lending from financial institutions, which can enhance significant economic growth and poverty alleviation. Skees closed his presentation with his latest social venture, Global Parametrics, which offers protection for each individual risk.


The discussion started with a remark from the audience, questioning whether it is good for risk mitigation to have collateral. Syengo highlighted that financial institutions require collaterals for loans to smallholder farmers. Agwe added that insurance would have been one of the tools to substitute for collaterals but basis risk is the main challenge for insurance companies to provide such insurance in a sustainable way. Agwe then stressed the importance of the concept of ‘bundling plus' which promotes uptake of agricultural insurance by smallholder farmers in combination with good agricultural practices (GAP), adapted credit, and end-markets that can pay reasonable prices. Agwe noted further that promoting insurance can be useful but you have to show farmers what the insurance is covering and how the farmer can use the product. Agwe also responded to the question on how you separate the low productivity effect from the climate effect. How can you be sure that global climate change is the reason? Agwe agreed that you cannot attribute all changes in production to climate change, but he stated clearly that climate change is the most important factor in increased risks in smallholder farmers' production. Skees agreed, but also added the loss of biodiversity as a result of climate change. Skees concluded the discussion by mentioning the opportunities that developing countries have because many smallholders frequently use new technologies, causing a leap frog in innovation compared to Western countries.