Microfinance and Index Insurance: Testing Business Models in the Agricultural Sector

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While access to credit is a key instrument to
alleviate rural poverty, microfinance institutions
(MFIs) are often unable to expand their agriculture
lending portfolio. One of the key constraints that
MFIs face is the exposure of agriculture lending to
shocks such as drought, flood, or locust which can put
farmers in a situation where they are unable to repay
their loans. Major agriculture shocks can indeed lead
to loan defaults and bank runs therefore resulting
in destruction of risk capital, reduced access to
liquidity, decreased lending and sometimes insolvency.
Evidence shows that credit supply decreases in cases
of weather shock, which is when access to finance
is most needed.