metadata: authors: 0: author: Klapper,Leora
1: author: Singer,Dorothe
2: author: Ansar,Saniya
3: author: Hess,Jake Richard
count: Africa
docna: 0: docna: Financial Risk Management in Agriculture :
            Analyzing Data from a New Module of the Global Findex Database
docty: Policy Research Working Paper
subtopic: Livestock and Animal Husbandry,Crops and Crop Management Systems,Climate Change and Agriculture,Food Security,Financial Sector Policy
teratopic: Agriculture
abstracts: cdata!: The ability to manage financial risk is
            especially important for people earning their living through
            agriculture. Many farmers only get paid once or twice a
            year, and households need to stretch their earnings across
            the year by saving or borrowing money. Moreover,
            agricultural production faces a variety of risks related to
            both production and markets because of their exposure to
            weather and disease shocks. Households engaged in
            agriculture may thus especially benefit from financial
            inclusion—access to and use of formal financial services.
            This paper explores the topic of financial risk management
            in agriculture—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. The
            paper summarizes new data based on a nationally
            representative survey of about 15,000 adults in 15
            lower-middle- and low-income Sub-Saharan African economies
            collected as part of the World Bank's Global Findex
            database. The majority of these adults reported suffering a
            bad harvest or significant livestock loss in the past five
            years, and most bear the entire financial risk of such a
            loss. Most adults in agricultural households lack the
            financial tools -- such as insurance, accounts, savings, and
            credit -- that could help them manage financial risks.
repnme: repnme: Financial Risk Management in Agriculture :
            Analyzing Data from a New Module of the Global Findex Database
display_title: Financial Risk Management in
            Agriculture : Analyzing Data from a New Module of the Global
            Findex Database
listing_relative_url: /research/2019/12/31629043/financial-risk-management-agriculture-analyzing-data-new-module-global-findex-database
topicv3: Agriculture and Food Security m1326205 435,Crop Production m1326627 174,Financial Inclusion m1327456 363,Agricultural Risk and Security m1327607 1967,Livestock m1504490 4024
publishtoextweb_dt: 2019-12-11T00:00:00Z
historic_topic: Agriculture
origu: DECRG: Finance & Priv Sec Devt (DECFP)
no_of_pages: 18
author_keys: 0: author_key: 390572
1: author_key: 1059220
2: author_key: 1205411
3: author_key: 1370891
model_extractions: Policy Research Working Paper 9078

# Financial Risk Management in Agriculture

Analyzing Data from a New Module of the Global Findex Database _Leora Klapper Dorothe Singer Saniya Ansar Jake Hess_ Development Economics Development Research Group December 2019
Policy Research Working Paper 9078

# **Abstract**

The ability to manage financial risk is especially important for people earning their living through agriculture. Many farmers only get paid once or twice a year, and households need to stretch their earnings across the year by saving or borrowing money. Moreover, agricultural production faces a variety of risks related to both production and markets because of their exposure to weather and disease shocks. Households engaged in agriculture may thus especially benefit from financial inclusion—access to and use of formal financial services. This paper explores the topic of financial risk management in agriculture—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. The paper summarizes new data based on a nationally representative survey of about 15,000 adults in 15 lower-middle- and low-income Sub-Saharan African economies collected as part of the World Bank’s Global Findex database. The majority of these adults reported suffering a bad harvest or significant livestock loss in the past five years, and most bear the entire financial risk of such a loss. Most adults in agricultural households lack the financial tools—such as insurance, accounts, savings, and credit—that could help them manage financial risks.

This paper is a product of the Development Research Group, Development Economics. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at lklapper@worldbank.org and dsinger@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Financial Risk Management in Agriculture: Analyzing Data from a New Module of the Global Findex Database**

Leora Klapper, Dorothe Singer, Saniya Ansar, and Jake Hess<sup>1</sup>

**JEL Classification:** D14; G21, G22, O16; Q14

**Keywords:** Financial Inclusion, Sub-Saharan Africa, Agriculture, Risk, Insurance, Household Finance

> 1 Leora Klapper (lklapper@worldbank.org), Dorothe Singer (dsinger@worldbank.org), Saniya Ansar (sansar1@worldbank.org), and Jake Hess (jhess1@worldbank.org) are with the World Bank. This paper’s findings, interpretations and conclusions are entirely those of the authors and do not necessarily represent the views of the World Bank, their Executive Directors, or the countries they represent. We are grateful to the Bill & Melinda Gates Foundation for providing financial support making the collection and dissemination of the 2017 Global Findex data possible and to the AXA Foundation for financial support to develop the module on financial risk management in agriculture.
Financial inclusion can help drive development by helping people escape poverty. Financial services can facilitate investments in health, education, or businesses and make it easier to manage financial emergencies. The ability to manage financial risk is especially important for people earning their living through agriculture. Many farmers only get paid once or twice a year and households need to stretch their earnings across the year by saving or borrowing money. Moreover, agricultural production faces a variety of risks related to both production and markets because of their exposure to weather and disease shocks. Households engaged in agriculture may thus especially benefit from financial inclusion – access to and use of formal financial services.

This paper explores the topic of financial risk management in agriculture – 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. The data draw from a module on agricultural risk management added in select economies to the 2017 Global Findex questionnaire.<sup>2</sup> Collected by the World Bank in coordination with Gallup, Inc., the data are based on a nationally representative survey of about 15,000 adults in 15 lowermiddle- and low-income Sub-Saharan African economies.<sup>3 4</sup> All averages, including for the 15 economies, are population weighted.

In the 15 surveyed economies in Sub-Saharan Africa, on average 35 percent of adults reported that their household relied on agriculture by growing crops or by raising livestock as the main source of their household’s income. But there is wide variation among economies (map 1). Ethiopia has the highest share of adults reporting relying on crops and livestock as their household’s main source of income, 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. The Democratic Republic of Congo has the lowest share of adults reporting relying on crops and livestock as their household’s main source of income, at 17 percent. See detailed country-level data on adults who rely on crops and livestock as their household’s main source of income in Annex 1.

> 2 The Global Findex database measures how adults around the world save, borrow, and make payments. For the complete methodology, see <u>https://globalfindex.worldbank.org/.</u>

> 3 Data were also collected in three additional upper-middle-income economies in Sub-Saharan Africa: Botswana, Gabon, and South Africa. However, the low rate of adults who reported that their household relied on agriculture by growing crops or by raising livestock as the main source of their household’s income does not allow for meaningful analysis because of the small number of relevant observations.

> 4 The module on agricultural risk management was also added to the 2017 Global Findex questionnaire in select non-Sub-Saharan African economies. Key summary statistics are reported in Annex 2.

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<!-- Start of picture text --> Map 1: A third of surveyed adults rely on agriculture by growing crops<br>or raising livestock as the main source of household income<br><!-- End of picture text --> Adults living in a household where growing crops or raising livestock is the main source of household income (%), 2017 <!-- Start of picture text -->
*<br>Less than 19%<br>MM 20-29%<br>ME 30-39%<br>MM 40-49%<br>HB 50-100%<br>No Data<br><!-- End of picture text -->

Source: Global Findex database. Note: Data are displayed only for economies in Sub-Saharan Africa.
The majority of adults living in households where agriculture is the reported main source of household income rely on crop growing. On average, 30 percent of adults reported living in households relying primarily on growing crops, while 5 percent of adults reported living in households relying primarily on raising livestock. This pattern holds among all 15 economies.

# **Financial risk, compensation for loss, and insurance**

Households that earn their main source of income in agriculture by growing crops or raising livestock face potential financial risks because of their exposure to extreme weather and disease shocks. In 2017, 64 percent of adults living in households earning their main source of income in agriculture reported that their household experienced a bad harvest or significant livestock loss in the past five years; this share ranges from 86 percent in Uganda to just under half in the Democratic Republic of Congo and Côte d’Ivoire (figure 1).

Most of the households facing agricultural loss bear the entire financial risk of such a loss, receiving no compensation through either an insurance payout or government assistance. Among the surveyed economies, on average fewer than 10 percent of adults living in households that experienced a bad harvest or significant livestock loss in the past five years reported that their household received compensation. In Mozambique, about a third of adults living in households that faced an agricultural loss reported that their household received compensation – the highest share among the surveyed economies.

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<!-- Start of picture text --> Figure 1: Among agricultural households experiencing a bad harvest or<br>significant loss of livestock, most bear all the financial risk themselves<br>Adults living ina household where growing crops or raising livestock is the main source of<br>household income (%), 2017<br>ce<br>[ES<br>Fas,<br>aR<br>Zaia<br>0% 10% 20% 30% 40% 50% 60%<br>@ Hada bad harvest or loss of livestock and received compensation<br>© Hada bad harvest or loss of livestock and did not receive compensation<br>@ Didnot have a bad harvest<br><!-- End of picture text --> Source: Global Findex database. Note: The total length of the bar represents the share ofadults living ina household where growing crops or raising livestock is the main source of income. The survey asked respondents if their household had a bad harvest in the past five years.
Figure 2: Use of crop or livestock insurance is low <!-- Start of picture text --> Adults living ina household where growing crops or raising livestock is the main source of<br>household income (%), 2017<br>Congo, Dem. Rep. ——<br>pl Em nn<br>cea [TR<br>aw<br>aySTS<br>randall<br>zara. il<br>0% 10% 20% 30% 40% 50% 60%<br>@ Had crop or livestock insurance in the © Did not have croporlivestock insurance<br>past 5 years in the past 5 years<br><!-- End of picture text --> Source: Global Findex database. Note: The total length of the bar represents the share of adults living in a household where growing crops or raising livestock is the main source of income. They survey asked respondents if their household got crop or livestock insurance in the past five years.
Among the 15 surveyed economies, a third of adults living in a household whose main source of income is in agriculture reported having an account (figure 3). By contrast, on average 40 percent of all adults in these economies have an account. But account ownership varies widely across the surveyed economies. Adults living in households whose main source of income is agriculture were less likely to report having an account than all adults in 8 of the 15 surveyed economies. These include the Central African Republic, Côte d'Ivoire, the Democratic Republic of Congo, Ethiopia, Mali, Mozambique, Nigeria, and Togo, where fewer than a third of adults living in a household whose main source of income is in agriculture reported having an account. In Benin, Rwanda, Tanzania, and Zambia the share of account ownership among adults living in a household whose main source of income is agriculture is similar to the national average. In Malawi, 39 percent of adults living in households whose main source of income is agriculture reported having an account – 5 percentage points higher than all adults on average. Kenya and Uganda, where mobile money has taken off and helped previously under-served adults get access to financial services, stand out with high shares of account ownership among adults living in households whose main source of income is in agriculture. In Kenya, 86 percent of these adults have an account; in Uganda the share is 70 percent, higher than the national average (59 percent).

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Figure 3: One-third of adults living in agricultural households have an account <!-- Start of picture text --> Adults living in a household where growing crops or raising livestock is the main source of<br>household income (%), 2017<br>Congo, Dem. Rep. |<br>RN<br>ai EE<br>a1NN<br>Mozarique|<br>0% 10% 20% 30% 40% 50% 60%<br>@ Has account © Does not have account<br><!-- End of picture text -->

Source: Global Findex database. Note: The total length of the bar represents the share ofadults living in a household where growing crops or raising livestock is the main source ofincome.
# **Saving patterns of adults living in agricultural households**

Saving money is a key aspect of managing financial risk and adults save in a variety of ways. Among the surveyed economies, 13 percent of adults living in households whose main source of income is in agriculture reported having saved formally in the past 12 months, at a bank or another type of financial institution (figure 4). A common alternative to saving at a financial institution is to save semi-formally, by using a savings club or a person outside the family. About 23 percent of adults living in households whose main source of income is in agriculture reported doing so and another 21 percent reported saving using other methods only. This may include saving in cash at home or saving in non-monetary ways including jewelry or real estate. About a third of adults living in households whose main source of income is in agriculture reported not saving any money. This replicates the overall pattern of savings in SubSaharan Africa where on average 15 percent of adults saved formally, while about another 19 percent saved semi-formally and 21 percent saved using other methods only. Only in Ethiopia, Kenya, and Rwanda, in line with national averages, did more than 20 percent of adults living in households whose main source of income is in agriculture report having saved formally. By contrast, and again in line with national averages, more than 60 percent of adults living in households whose main source of income is in agriculture in the Central African Republic and Mozambique reported not having saved at all.

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Figure 4: Most adults living in agricultural households use informal ways to save Adults living in a household where growing crops or raising livestock is the main source of household income (%), 2017 <!-- Start of picture text --> Central African Rep. hm<br>Congo, Dem. Rep. |<br>Voands<br>0% 10% 20% 30% 40% 50% 60%<br>@ Saved formally @ Saved semiformally<br>@ Saved using other methods only Did not save<br><!-- End of picture text -->

Source: Global Findex database. Note: The total length of the bar represents the share of adults living in a household where growing crops or raising livestock is the main source of income. People can save in multiple ways, but categories are constructed to be mutually exclusive. Saved formally includes all adults who saved any money formally. Saved semiformally includes all adults who saved any money semiformally but not formally.
majority (70 percent) of the crop farming households reported not having used a loan from a financial institution nor supplier credit for purchasing agricultural inputs in the past five years. In the Central African Republic, the Democratic Republic of Congo, and Rwanda fewer than 10 percent of crop farming households reported having used either method in the past five years.

Among households that borrowed to purchase agricultural inputs, more than 90 percent relied on supplier credit across surveyed economies in the past five years. The share of borrowers using a loan from a financial institution to purchase agricultural inputs in the past five years is low in most economies. Exceptions to that general observation are Ethiopia, where almost half of crop farming households that borrowed did so using a loan from a financial institution, and Mali and Zambia, where about a third that borrowed did so. Use of both a loan from a financial institution and supplier credit only stands out in Ethiopia where about 36 percent of borrowers made use of both methods in the past five years.

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<!-- Start of picture text --> Figure 5: Among crop farming households borrowing for agricultural<br>inputs, most relied on supplier credit in the past 5 years<br><!-- End of picture text --> <!-- Start of picture text --> Adults living in a household where growing crops is the main source of household income<br>(%), 2017<br>Central African Rep. iif<br>Congo, Dem. Rep. |<br>Cote d'ivoire ||<br>Kenya | a<br>Malawi :<br>Mozambique : UY<br>Rwanda LL.<br>Tanzania ll]<br>Togo<br>Uganda |<br>ania<br>0% 10% 20% 30% 40% 50% 60%<br>@ Used bank loan for inputs @ Used bank loan and credit for inputs<br>@ Used credit for inputs Did not use a bank loan nor credit for inputs<br><!-- End of picture text -->

Source: Global Findex database. Note: The total length of the bar represents the share ofadults living in a household where growing crops is the main source of income. The survey asked respondents their source for purchasing agricultural inputs in the past five years.
<!-- Start of picture text --> Figure 6: Adults living in agricultural households use various sources<br>for credit<br>Adults living in a household where growing crops is the main source of household income<br>(%), 2017<br>Central African Rep. iz<br>Congo, Dem. Rep. sl<br><!-- End of picture text --> Source: Global Findex database. Note: The total length of the bar represents the share of adults living in a household where growing crops is the main source of income. People may borrow from multiple sources, but categories are constructed to be mutually exclusive. Borrowed from a bank or used credit for agricultural inputs includes all adults whose household purchased agricultural inputs using a loan or supplier credit in the past five years. Borrowed formally includes all adults who borrowed any money froma financial institution or through the use ofa credit card in the past year but did not borrow from a bank or used credit for agricultural inputs in the past five years. Borrowed semiformally, through family or friends, or from other sources includes all adults who borrowed any money semiformally (from a savings club), through family or friends, or from other sources in the past year but not from a bank or used credit for agricultural inputs and not formally. The survey on financial risk management asked respondents about their source for purchasing agricultural inputs in the past five years. The Global Findex database asked respondents about their method of borrowing in the past year. The figure above combines the two responses.
market fluctuations. One way to help these adults get financial services is to increase the use of digital payments in agricultural supply chains.

Digitizing payments for the sale of agricultural products offers opportunities for increasing the use and thus the potential benefits of accounts for those who already have an account. At the same time, Global Findex data show that digitizing agricultural payments is also 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.

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