Can Insurance Unlock Agricultural Credit And Promote Economic Growth

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Can Insurance Unlock Agricultural Credit And
Promote Economic Growth?

• Carolina Trivelli, Michael R. Carter, Francisco
  Galarza, Alvaro Tarazona, Johanna Yancari
• Instituto de Estudios Peruanos and University of
  Wisconsin

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Presentation outline

• Peruvian agricultural credit
• Case study Piura
• Ag credit supply
• Ag credit demand
• Ag credit transactions
• Risk matters?
• 3. New insurance products
• 4. Ongoing research

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Peru Agricultural Credit Supply
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Peru Agricultural Credit Supply
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Peru Credit for Rural population
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Evolution of Agricultural Portfolio in Peru by
type of MFI (US millions)
Total Ag Credit represents less than 3.5 of the
financial system portfolio, and serves around
40,000 clients.
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PIURA
Total area 35.892,49 km2 (2,79 of Peruvian
area) Agricultural area 244.360 ha (4,46 of
Peruvian agricultural area)
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Piura Agricultural Credit Supply
Evolution of Agricultural Portfolio in Piura and
Rest of Perú (Oct - 2005)
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MFIs agricultural funding situation in Piura
(October 2005)
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Piura Agricultural Credit Supply
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Piura Agricultural Credit Supply
Loans Costs and conditions from the two main
lenders for small producers
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Piura Agricultural Credit Demand - based on
BASIS survey of 481 households 2004 -
Credit Types by Piuras Households
To base on IEP- UC Davis. Peru Rural 2004
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Piura Credit access
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Piura Agricultural Credit Demand - based on
BASIS survey of 481 households -
Credit Transactions Characteristics
Based on IEP- UC Davis. Peru Rural 2004
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Market transactions
1 2 3 4
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For borrowers and potential borrowers risks (of a
shock) are important
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Piura Presence of shocks
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Risks are important for lenders
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Portfolio at risk in Piura during the 1997-1998
El Niño
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Insurance can help ?

• We are working with three insurance options that
  seek to be moral hazard proof
• ENSO (El Niño)
• DCA
• Average yields insurance

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ENSO index insurance GlobalAgRisk(Skees)

• GAR has developed a prototype insurance based on
  El Niño Southern Oscillation (ENSO) 1-2 index,
  which is derived from sea-surface temperatures
  just off the coast of northern Peru
• ENSO 1-2 measures sea-surface temperatures off
  the coast of Peru as deviations from normal
  index is positive if temperatures are above
  normal, negative otherwise
• ENSO 1-2 indices are normally between -2 and 2

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ENSO index insurance Global agricultural risk

• Statistical analysis performed by Miranda and
  Lal, an El Niño expert from Columbia University
  of New York indicate that ENSO 1-2 is an
  excellent predictor of catastrophic El Niño
  events
• Using available rainfall and reservoir inflow
  data dating back to 1972, we identified two
  years, 1983 and 1998, of catastrophic rainfall
  levels exceeding 3 standard deviations above
  normal
• These are precisely the two years in which
  extreme ENSO 1-2 measurements in excess of 2 were
  observed

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ENSO index insurance Global agricultural risk

• Prototype insurance product would be based on
  average ENSO 1-2 measurements in January and
  February, which coincides with major growing
  season in Piura
• Contract does not pay if index is less than 2 and
  pays full liability if index is greater than 3
• In between, contract pays proportionately for
  example, if index is 2.5, contract pays 50 of
  liability
• This indemnity structure is designed to provide
  significant indemnities in years of major El
  Niño's, which arise about once every 15 years

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DCA partial portfolio guarantee(USAID)

• Partial portfolio guarantee seeks to help MFI to
  increase their lending supply in sectors
  considered with high risk without endangering
  their portfolio security.
• Available for two institutions in Piura, since
  January 2006 (CMAC Piura and CMAC Sullana)
• The partial portfolio guarantee covers up to 50
  of the portfolio losses.
• Only agricultural SMEs (small and medium
  enterprises) and medium and long term investment
  loans for microenterprises of all sectors can be
  placed under the coverage of the guarantee.

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DCA partial portfolio guarantee

• Each institution can place 6 million in
  accumulated loans under the coverage of the
  guarantee.
• Each institution has to pay one initiation fee (1
  flat of the total amount covered) and periodic
  utilization fees (1 per year of the average
  outstanding portfolio covered)
• And has 5 years to use the full amount of the
  partial guarantee

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DCA use CMAC Sullana

• CMAC Sullana has shown remarkable dynamism,
  placing 466 loans, with an average amount of US
  2,422, under the DCA guarantee between January
  and March 2006 (for aprox. USD 1 million)
• 100 of these loans are for agriculture (81 for
  rice production)
• Loans go to old clients (too soon to ask for new
  ones?)

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Average yields insurance

• Not in the market (yet)
• Ongoing research by Michael Carter and Francisco
  Galarza using data from Chancay-Lambayeque valley
  and rice yields.
• To estimate three things
• Probability distribution for pdf of water
  outflows
• Average valley yields and area planted as a
  function of ?vt
• Estimate distribution of farmer yield
  sensitivity
• where the bi determine extent of yield ( risk)
  correlation
• Simulate returns on MFI portfolio with and
  without insurance
• Calculate willingness to pay measures for
  insurance products

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Ongoing Research

• We want to learn how things in the credit market
  will change with the introduction of different
  insurance products
• DCA El Niño Insurance are interesting
  interventionsbut will they work?
• Will they relax constraints on ag lending?
• Will the benefits trickle down (is there
  sufficient competition in financial markets)?
• Credit rationing will decrease?
• This type of insurance (portfolio) will increase
  the distributional problem among ag households?

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Ongoing Research what will change in this
figure?
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Ongoing Research

• Difference-in-Difference Design
• Piura (treated area) versus Chepen (control area)
• Baseline Follow-up Surveys
• Concerned about separating the effects DCA from
  El Niño Insurance
• Analysis at two levels
• Supply-side of market (portfolio contract term)
• Farm surveys (rationing, farm productivity,
  efficiency)
• Baseline surveys just ended few weeks ago
• Analysis will take some time
• In the meantime, we are getting qualitative
  feedback from MFI interviews

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We have many questions, no answers
yet! Thanks!
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Households With Formal Loan
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Rationed Households
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Rejected Households
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Households Without Formal Loan
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Banks' agricultural funding situation in Piura
(October 2005)
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