By M. Mehrab Bakhtiar, Md. Aminul Karim, Raisa Shamma, Md. Redoy, and Julie Ghostlaw
In Bangladesh, farmers are highly vulnerable to various types of shocks. Access to agricultural finance is critical for mitigating the impact of shocks on smallholder farmers. While microcredit has become a major tool for promoting poverty reduction, economic empowerment, and gender equality in Bangladesh, access to agricultural finance like microinsurance remains limited. Why?
On January 23-24, 2023, IFPRI and the Bill & Melinda Gates Foundation conducted a field visit to Dinajpur and Nilphamari districts, Rangpur division, northern Bangladesh to better understand the agricultural microinsurance context in the region. During the visit, IFPRI researchers spoke with farmers, upazila-level agricultural officers, microfinance institution representatives, insurance providers, and NGO staff, who laid bare several supply- and demand-side barriers in accessing agricultural microinsurance.
There are limited data available to connect the dots
Index-based insurance requires high quality data – data that are timely, relevant, and available over a long time horizon – to inform effective, reliable, farmer-centric solutions.
In Bangladesh, available agricultural micro-insurance is predominantly weather-based. This means that insurance companies validate, and process claims based on the amount of rainfall, the temperature reached, or some other weather-related metric. Stakeholders mentioned that there is considerable confusion regarding the data that is used to assess weather triggers for potential pay-outs. These data are often from disparate sources (remote sensing data of different resolutions are available from several sources; some weather index insurances are based on local weather stations which pose a different set of measurement problems) that are challenging to process and harmonize. Some of these challenges have been compounded due to an absence of a guiding framework/overseeing body.
During the immediate outset of a crisis, most smallholder farmers need access to resources immediately. IFPRI research in Bangladesh during the COVID-19 pandemic found that farmers resorted to potentially damaging coping strategies, including selling productive assets like livestock, which can perpetuate a vicious cycle of poverty (Ahmed et al., 2020b). Various farmers lamented that insurance pay-outs can take up to 3 to 4 months due to the time needed to collect and validate data and estimate the actuarial.
Many agricultural microinsurance options do not cater to farmers’ needs and demands
Today, most agricultural microinsurance is not designed to de-risk the many setbacks faced by smallholder farmers. For instance, farmers mentioned one provider’s livestock insurance policy, which covers the death of livestock, but not diseases. Insuring livestock to cover medical expenses to prevent the loss of such valuable assets is a missed opportunity. Other stakeholders mentioned that the insurance pay-out falls short of the actual costs incurred. Many livestock farmers were in favor of bundling insurance with medical coverage and services like vaccination programs, creating livestock hubs, and/or linking farmers with private input companies.
Some institutions are already coupling agricultural microinsurance with top products. Syngenta Commercial, for instance, started bundling goods that are already popular among smallholder farmers with agricultural microinsurance at no extra cost and with very rudimentary documentation, albeit on a limited scale. This was a win-win approach by introducing farmers with additional coverage and carving out an avenue for additional profits in the long run as farmers become more familiar with a wider variety of services, including agricultural microinsurance.
Agricultural microinsurance providers have very limited bandwidth
Despite the potential benefits of agricultural microinsurance in Bangladesh, insurance providers also face numerous challenges in providing coverage to farming communities. In addition to glaring supply-side challenges that constrain smallholder farmers’ access to agricultural microinsurance, there is a lack of human resources and technical capacity within financial institutions to develop insurance scheme/products and support customers. Various stakeholders also pointed out that staff are generally not well-trained. Very few companies have the ground presence needed to support customers adequately.
There is low financial literacy among smallholder farmers
Although microfinance is pervasive in Bangladesh, agricultural microinsurance is less known. Many smallholder farmers do not understand the complex terms and conditions of agricultural microinsurance. When asked, various farmers could not recollect the insurance coverage policies that they have, and others did not have understanding on how their insurance payouts were calculated based on the rainfall, humidity, or whatever weather-related metric is used. A lack of financial literacy can, at best, dissuade farmers from taking advantage of existing options at all, and at worst, leave them susceptible to predatory lending practices.
Along the same vein, while women are essential across the agricultural value chain in Bangladesh, IFPRI’s research in Bangladesh shows that women have limited control over use of income and resources (Sraboni et al., 2014). IFPRI’s research in Bangladesh during COVID-19 found that, by April 2020 – only one month after the onset of the pandemic – over half of women who had earned income pre-COVID had their incomes completely cut off (Ahmed et al., 2020a).
This gender imbalance has made it more challenging for women farmers to do business. Promoting financial literacy is a necessary first step in levelling the playing field between women and men smallholder farmers in Bangladesh.
Affordability is a driving factor for smallholder farmers
Understandably, cost is a prohibitive factor for smallholder farmers to access finance. While there is an appetite among farmers to buy microinsurance, medium and large farmers who tend to be better off are more willing and able to purchase insurance products. On the other hand, many smallholder farmers expressed interest in purchasing insurance for all their livestock, but are deterred by high premiums, the burden of VAT on both premiums and payouts, the uncertainty of whether the payoff will offset their increased operational costs, and the requirement to pay the entire premium at once (instead of by installments).
To add, various farmers in Sayedpur noted that livestock farming is not as profitable as it once was. The operational costs of livestock farming are increasing, with high feed and vaccine costs, increasing daily wages because of labor shortages, lack of health care service for livestock, and low prices of milk are hurting farmers. In response, farmers are reducing their farm size and are reluctant to purchase insurance.
The inability to transfer insurance coverage on livestock in Bangladesh, even upon sale, adds further difficulties for smallholder farmers who are concerned about recouping their investments. Various farmers called for policy changes allowing for transferability, with the potential to boost the value of insured cattle in the market.
Breaking through supply- and demand-side barriers to reach Bangladesh’s uninsured
In Bangladesh, access to agricultural microinsurance is limited due to several supply- and demand-side barriers. Limited or low-quality data and slow data processing cause challenges for insurance providers, and lead to delays in payouts. This is further compounded by limited capacity and resources of insurance providers. The fact that agricultural insurance products are not responding to the needs and demands of smallholder farmers, combined with low financial literacy among farmers, contributes to low uptake of agricultural microinsurance.
The obstacles are manifold. Insights from the field draw one clear conclusion: it is time to rethink agricultural microinsurance. Building upon these ground-level observations, IFPRI and the Bill & Melinda Gates Foundation jointly organized the stakeholder consultation, “Agricultural Microinsurance: Opportunities and Challenges” on January 26. Check out this blog to learn more!
This blog is based on research funded by the Bill & Melinda Gates Foundation. The findings and conclusions contained within are those of the authors and do not necessarily reflect positions or policies of the Bill & Melinda Gates Foundation. For more information on the Climate Change x Agriculture investment, please visit the project page on the IFPRI-Bangladesh microsite.
Mehrab Bakhtiar is a Research Fellow in the Poverty, Health, and Nutrition Division at IFPRI. Raisa Shamma is a Research Analyst in the Poverty, Health, and Nutrition Division at IFPRI. Md. Aminul Karim is a Research Analyst in the Poverty, Health, and Nutrition Division at IFPRI. Md. Redoy is a Field Research Officer in the Poverty, Health, and Nutrition Division at IFPRI. Julie Ghostlaw is a Country Program Manager in the Poverty, Health, and Nutrition Division at IFPRI.
Sources:
Ahmed, A.U., Bakhtiar, M.M., Abedin, N., Ghostlaw, J., 2020a. Assessing COVID-19’s effects on gender-related issues using a phone survey in the Feed the Future Zone of Influence in Bangladesh. International Food Policy Research Institute, Dhaka, Bangladesh.
Ahmed, A.U., Bakhtiar, M.M., Ghostlaw, J., 2020b. Assessing COVID-19’s effects on socioeconomic and food security characteristics through phone surveys in Bangladesh. International Food Policy Research Institute, Dhaka, Bangladesh.
Sraboni, E., Malapit, H.J., Quisumbing, A.R., Ahmed, A.U., 2014. Women’s Empowerment in Agriculture: What Role for Food Security in Bangladesh? World Development 61, 11–52. https://doi.org/10.1016/j.worlddev.2014.03.025