Weather Derived Insurance Pilot Project Weather Risk Isurance

Weather Derived Insurance Pilot Project Weather Risk Isurance Project 1

Introduction to Smallholder Farmers in Malawi…. l l l l Small land holdings (0. 4 -4 ha/farming family) Production on customary land (cannot use land as collateral for micro-financing) 85 % of production under rain fed systems (high risk exposure to drought conditions) 35% Literacy levels (limited capacity to technology adoption) Limited access to inputs and services (low yield and quality of outputs) Poor access to profitable markets (emphasis on subsistence production) 42% of population below $1/day (limited collateralization capacity) Weather Risk Isurance Project 2

Brief Introduction to weather risk insurance…. l l l An approach to insuring production loans against reduced production arising from drought Linked to amount of rainfall critical for adequate harvest Pegged to critical levels of rainfall below which a payout is triggered The level of payout is proportional to the extent of rainfall failure Where adequate rainfall experienced, no payout made Weather Risk Isurance Project 3

The players…… and their main role…. . . NASFAM l To mitigate the burden of smallholder farmers paying back loan after a failed crop due to drought Micro-Finance Institutions l To safeguard their loans in both good and bad years Insurance Association of Malawi l Entry point into the smallholder sector World Bank (Commodity Risk Mgt Group) l To introduce and apply the drought index based insurance as a risk management tool for food security Weather Risk Isurance Project 4

The Crop Options…. Selection Criteria Crop Input usage Marketing System High value Suitability to shf Chillies Sensitivity to drought 1 1 4 5 5 Cotton 2 5 3 2 5 Groundnuts 5 3 4 4 5 Maize grain 5 4 1 1 5 Seed maize 5 4 5 5 1 Paprika 3 5 4 4 3 Rice, rain-fed n/a 3 3 3 4 Rice irrigated n/a 4 4 3 4 Soya 4 2 1 2 4 Tobacco 3 5 5 5 4 Scores 1=Not suitable 5=Highly suitable Weather Risk Isurance Project 5

Selection of Area of Operation…. l Where NASFAM is operating l Where groundnuts are produced l Proximity (within 20 km radius) to a reliable weather data centre Weather Risk Isurance Project 6

Project Summary…. Association Management Centres No. of Farmers Seed issued (Kg) Lilongwe North 580 18, 560 3, 198, 213 23, 345 Kasungu 223 7, 136 161, 000 1, 175 Nkhotakota 79 2528 454, 282 3, 316 Total 882 28224 3, 813, 495 27, 860 Weather Risk Isurance Project Total Loan MK $ 7

Cost of the Package to the Farmer…. __________________________ Details MK $. Loan Processing fee* 43. 83. 32 32 kg seed at MK 125/kg (US$0. 90/kg) 4, 000. 00 29. 20 Interest on loan (33% p. a. for 9 months) 990. 00 7. 23 Insurance premium @ 7% of loan package 382. 72 2. 79 Surtax on insurance premium@ 7. 5% 28. 70. 21 Total 5, 445. 25 39. 75 *Not applicable to OIBM loans Exchange rate: MK 137. 00=US$ 1. 00 Weather Risk Isurance Project 8

Lessons learnt…. l l l Farmers liked the project as it provided access to credit Farmers request that optional crops to include commercial maize Farmers were coerced to form clubs that were not socially related hence collective liability for default is weak To clearly explain the whole concept to farmers before registration into the program Farmers to ensure that they plant within the rainfall pentade that triggers the contract Weather Risk Isurance Project 9

Lessons learnt…. l l l It will be necessary to install rain gauges nearer farmers as backup Field staff to be involved at all stages of developing the project The contract form to include space for the local authority (Chief or Village Headman) to endorse the loan application Weather Risk Isurance Project 10

Way forward…. l l Conduct a second year evaluation within the current partner coalition Scale up and Scale out Ø Ø Ø l Scale up within the original areas, no limits to scale of production Scale up into other crops Scale out into another area (Mchinji) Pilot-test stand alone maize program Weather Risk Isurance Project 11

The Way Forward…. l l l Manual to be developed on an on-going basis to capture all the issues from the beginning to the end. To include effective contractual arrangements Engage other stakeholder from the beginning as a strategy for scaling up and scaling out (Ministry of Agriculture, Estate sector, Input suppliers, marketing institutions) Due to the topography of Malawi, re-look the 20 km radius. (Possibility of auto-recording weather stations) Weather Risk Isurance Project 12

Other issues…. l l While farmers will be encouraged to have the insurance cover, it is suggested that it should not be a pre-condition for accessing microfinance facilities Seriously re-look financing for maize grain Premium affordability Negotiate for a re-look at the interest rate, or as a positive factor in favour of farmers applying for a loan Weather Risk Isurance Project 13

Current Status…. Details (Currency figures in Malawi Kwacha) $1=MK 140 Kasungu Mchinji 65 425 355 32 3900 Insurance + Surtax 17. 5% 898. 62 1082. 29 897. 75 889. 79 Total Loan Package 4798. 62 4982. 29 4797. 75 4789. 79 3680 Insurance + Surtax 17. 5% 451. 87 343. 58 429. 87 297. 98 Total Loan Package 4131. 87 4023. 58 4109. 87 3977. 98 Number of farmers targeted Cost of maize inputs (seed + fertilizers) Cost of groundnut inputs (32 kg seed) Weather Risk Isurance Project Lilongwe N Nkhotakota 14