Randomized Evaluations (REs) Identify an eligible population Before the program starts, randomly assign individuals (or villages, schools, etc.) to different groups Treatment: receives intervention Comparison: status quo Groups are statistically equivalent due to randomization Any difference in outcomes can be attributed to the intervention
How might credit market constraints affect technology adoption? Farmers don’t have cash to cover the upfront costs of adoption Farmers don’t have collateral to back a loan Farmers don’t have financial literacy needed to use credit There is no credit available Farmers struggle to save income from one harvest to the next
How might improving access to credit help? Access to financial products can affect agricultural activity Switching to higher-value crops Investing in long-lasting inputs crop-related expenditures fertilizer use Ashraf et al. 2009; Crepon et al. 2013; Tarozzi et al. 2013; Beaman et al. 2014; Karlan et al. 2013; Carter et al. 2013
Challenge of agricultural lending Clients often lack adequate collateral Lenders cannot schedule frequent repayments All farmers need cash at the same time (planting season) Joint liability may be ineffective if individual production shocks are correlated with weather Lenders have limited information on profitability of customers
When does credit work? 1.Flexible collateral arrangements Asset collateralized loans for dairy farmers 2.Improved information about borrowers to improve credit markets Fingerprinting to reduce risky borrowing 3.The most successful credit interventions account for seasonal distribution of farmer income Harvest time storage loans Incentives to prepay for inputs Credit with repayment deferred until harvest
Flexible collateral arrangements Researchers evaluate alternative credit contracts to facilitate purchase of new agricultural technology Population: Kenyan smallholding dairy farmers Problem: Insufficient water supply; under-watering cows affects milk productivity Asset: 5,000 liter rainwater harvesting tank The technology is expensive! Use to smooth water consumption through the dry seasons (also used for providing livestock water) Cost: 24,000 KSh = $320 ~ 20% of HH consumption Unsurprisingly, very low adoption rates De Laat, Joost, William Jack, Michael Kremer and Tavneet Suri. 2014. “Encouraging adoption of rainwater harvesting tanks through collateralized loans in Kenya.” Working paper.
The players Dairy cooperative: Receives milk delivered by farmers every day Tests, cools, stores, and transports milk to processing plant Pays farmers Potentially facilitates debt collection Savings and Credit Cooperative (SACCO): Holds savings of members (and some non members) Makes loans to members for livestock services as well as non-farm needs Requires 100% cash collateralization De Laat et al., 2014
Testing innovative credit contracts i.100% cash collateralized joint-liability loan Borrowers required to make deposit equivalent to 1/3 loan value Three guarantors required to insure 2/3 loan value through savings with cooperative Contract resembled standard loan contract typically used by the cooperative ii.4% deposit, asset collateralized loan Small (Ksh 1,000) deposit required at signing (4% of loan value) iii.25% deposit, asset collateralized loan Larger (Ksh 6,000) deposit required at signing (25% of loan value) iv.25% guarantor, asset collateralized loan Small (Ksh 1,000) deposit required at signing (4% of loan value) Single guarantor required to pledge Ksh 5,000 (21% of loan value) Critical to design: Repayments automatically deducted from monthly milk sales at the cooperative De Laat et al., 2014
Zero default with innovative credit contract Asset collateralization significantly increased take up Default rates no different Farmers equally likely to repay loan under all contracts Biggest innovation: Collateralized loans perform equally well Results suggest that access to credit can be improved at little cost to lenders Relaxed deposit/guarantor requirements did not create more risk for the lender With access to tanks, cow health and productivity improved Education and time-saving impacts for girls De Laat et al., 2014
Policy lessons Many people who want to borrow prevented from doing so by heavy deposit or guarantor requirements Farmers vastly preferred asset collateralization to joint-liability ⇒ asset collateralization means banks could extend many more loans Extending more loans didn’t create more risk for lender Automatic repayment structure facilitated simplified repayments (farmers don’t need to figure out where to get cash to repay their loans) Asset collateralization successful in this context: could it work more broadly? Must be careful of the asset – can’t be small, movable or easy to hide Tanks large visible asset, difficult to hide Farmers valued the benefit of the tank, keen to not have the tank repossessed De Laat et al., 2014
1. Harvest time storage loans 2. Incentives to prepay for inputs 3. Credit with deferred repayment
Accounting for seasonal distribution of farming income Large and regular seasonal fluctuations in grain prices Increases of 50-100% between post-harvest lows and pre- harvest peaks are common Farmers face difficulty using storage to save grain for sale at times of high prices Due in part to limited borrowing opportunities Farmers often sell grain at post-harvest low prices to meet urgent cash needs To meet consumption needs later in the year, farmers may end up buying back grain a few months after selling it Maize market functions as high-interest lender of last resort Burke, Marshall. 2014. “Selling low and buying high: An arbitrage puzzle in Kenyan villages.” Working paper, March 20, 2014.
Monthly average maize prices (1994-2001) Burke, 2014
Buy low and sell high? Fact 1: Maize prices double over seasonal price fluctuations Fact 2: Farmers have ability to store maize for sale at later date So store maize and sell when prices rise later in year? Find the opposite: Farmers sell low and buy high! Q: Why do you sell at harvest instead of later, when prices are higher? A: I need the cash Burke, 2014
With OAF, offered a storage loan In partnership with agricultural microfinance NGO, One Acre Fund Researchers offered cash loan (~$100) at harvest time to randomly selected OAF smallholder maize farmers Treatment 1: Loan given at harvest Treatment 2: Loan given 3 months after harvest Stored maize as collateral 10% interest, repay flexibly Take up was very high: >70% Burke, 2014
Overall price rise was exceptionally small in this year Burke, 2014
Results at the farmer level Even with low price rise: 20% return on investment after loan repayment for farmers offered the loan at harvest Burke, 2014
Policy lessons Access to well-timed credit can help improve the profitability of small farmers Absence of credit markets spills over into other markets that matter for the poor Missing credit market exacerbate seasonal price swings When is this type of loan relevant? Markets with high seasonal price fluctuations Crops with storage potential Burke, 2014
Timing is crucial for adoption Low adoption of profitable farming inputs such as fertilizer Policy response in many countries ⇒ heavy fertilizer subsidies Even with subsidies, fertilizer is expensive and adoption is low. Unaffordability is only part of the problem: Timing for input purchase Universal tendency of procrastination may also be important Duflo, Esther, Michael Kremer, and Jonathan Robinson. 2011. “Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya.” American Economic Review.
Nudging farmers to prepay for inputs Researchers evaluate whether small, time-limited incentives for advanced fertilizer purchase can increase adoption? Intervention: Farmers visited directly after harvest time and offered chance to prepay for fertilizer voucher Fertilizer offered at full price, but included small incentive of free delivery Compared to 50% discount on fertilizer offered at application time Duflo et al. 2011
Prepayment increased fertilizer adoption Offering option to purchase full-price fertilizer at harvest time led to the same take-up as offering a 50% discount on the fertilizer at planting time Duflo et al. 2011
Policy lessons Can be implemented as a small subsidy for early purchase Small commitment devices can nudge people to overcome savings problems and procrastination Commitment savings devices have also been highly successful at increasing investment in agricultural technologies A small “nudge” at the appropriate time was as powerful as a heavy subsidy—and may be a better policy Duflo et al. 2011
Credit with deferred repayment Several studies find that offering loans with repayment delayed until harvest can increase technology adoption In Mali – input use increased and rice output increased by 31% In Uganda – similar impacts on maize production TOMOYA MATSUMOTO, TAKASHI YAMANO, AND DICK SSERUNKUUMA. “Technology Adoption and Dissemination in Agriculture: Evidence from Sequential Intervention in Maize Production in Uganda” Lori Beaman, Dean Karlan, Bram Thuysbaert, and Christopher Udry. 2013. “Profitability of Fertilizer: Experimental Evidence from Female Rice Farmers in Mali” American Economic Review
Improved information about borrowers Addressing other sources of risk for lender: Positive identification of borrowers Lenders use “dynamic incentives” to elicit timely repayment and lower lending costs Without dynamic incentives, lenders may limit supply of credit Biometric technology: methods for identifying people based on unique physical or behavioral traits Unique to each person - cannot be lost, forgotten or stolen Fingerprinting can make the idea of future credit denial more than a threat. Financial institutions can: Withhold new loans from past defaulters Reward responsible past borrowers with increased credit Store borrower repayment behavior year to year (credit bureaus) Gine, Xavier, Jessica Goldberg, and Dean Yang. 2012. "Credit Market Consequences of Improved Personal Identification: Field Experimental Evidence from Malawi." American Economic Review
Fingerprinting to reduce risky borrowing Partner with a Malawian lender to randomize implementation of personal identification technology among loan applicants Intervention: biometric (electronically scanned) fingerprinting Malawi lacks a national ID system, so fingerprinting may improve personal identification, potentially improving effectiveness of dynamic incentives Key questions researchers ask: What is the impact of fingerprinting on loan repayment? Is impact heterogeneous across borrower types? Prospect: may raise lending profitability and encourage lenders to expand rural credit provision Gine et al. 2012
Testing improved dynamic incentives Malawi Rural Finance Company (MRFC) provides loans to paprika farmers in central Malawi Collaboration with private paprika buyer, Cheetah Paprika Ltd. Provided loan product for subsidized paprika farming inputs Loans in the form of vouchers ⇒ borrowers collect inputs from suppliers ⇒ suppliers bill directly to MRFC CP forwards loan repayment to lender (MRFC) before farmer paying farmer Intervention: Educational module on importance of credit history Biometric fingerprint collected during loan application Use of fingerprints for unique identification explained and demonstrated to farmers Gine et al. 2012
Results: Loan repayment behavior Gine et al. 2012 Fingerprinting improved loan repayment, particularly for riskiest borrowers
Fingerprinting allows the lender to more effectively use dynamic repayment incentives: Withholding future loans from past defaulters Rewarding good borrowers with better loan conditions Personal identification improved repayment rates, particularly for riskiest borrowers Borrowers not deterred from seeking credit, rather Risky borrowers took out smaller loans Less fertilizer diverted away from paprika crop Policy lessons Gine et al. 2012
Policy lessons Using biometric technology to identify borrowers had a high rate of return for the lender Benefit ‐ cost ratio is 2.27 $3.36 benefit vs. $1.48 cost per individual fingerprinted Improved identification may address one barrier to providing credit in rural areas Borrower responses to personal identification systems offer lessons for establishing credit bureaus Gine et al. 2012
Conclusions & recap Heavy deposit/guarantor requirements prevent many potential borrowers from accessing credit Asset collateralized lending and automatic repayments offer a promising solution More research is needed to assess impact of asset collateralized lending in other contexts Improving lender’s ability to identify clients and store repayment behavior can reduce risky borrowing More research underway to understand implications of establishing credit bureau
Conclusions & recap Harvest-time credit allowed farmers to buy maize at low prices and sell stored maize at high prices later, increasing profits Evidence suggests that policies that help farmers commit to save or prepay for inputs can increase investment in technology Credit products with payment deferred until harvest can increase use of inputs
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