Topic 5: Agricultural Credit and Insurance
1. Agricultural Credit
Credit is money or goods borrowed for farm use and repaid later, usually with interest.
Types of Credit
| Type |
Repayment period |
Uses |
| Short-term |
Less than 1 year |
Seeds, fertiliser, chemicals, wages |
| Medium-term |
1 to 5 years |
Machinery, dairy cows, farm structures |
| Long-term |
More than 5 years |
Land purchase, major buildings, irrigation |
By form: cash credit and credit in kind (inputs).
By security: secured (collateral) and unsecured.
2. Sources of Credit
- Commercial banks
- Agricultural Finance Corporation (AFC)
- SACCOs and cooperative societies
- Microfinance institutions
- Government and youth/women funds
- Input suppliers (credit in kind)
- Friends, relatives and merry-go-rounds
- Self-help groups and NGOs
3. Importance of Credit
- Allows farmers to expand production.
- Allows purchase of machinery and inputs.
- Helps in adopting new technology.
- Helps in bridging cash shortages before harvest.
4. Factors Considered by Lenders (Credit Worthiness)
- Character and repayment record.
- Repayment capacity (farm income).
- Security (collateral such as a title deed).
- Purpose of the loan and viability of the project.
- Management skills and records.
- Business conditions (market, weather).
Qualities of a Good Credit Source
- Adequate and timely.
- Low interest rates.
- Flexible repayment terms.
- Simple procedures.
- Provides advice and training.
Problems of Credit
- High interest rates.
- Lack of collateral (many farms lack title deeds).
- Delays in loan approval.
- Misuse of loans.
- Risk of loss from drought or disease.
5. Agricultural Insurance
Insurance is protection against loss where the farmer pays a premium to an insurer who compensates for specified risks.
Risks Insured
Fire, theft, floods, drought, hail, pests and diseases, accidents, and death of livestock.
Types
- Crop insurance (including index-based schemes)
- Livestock insurance
- Farm buildings and machinery insurance
- Fire and theft insurance
- Personal accident and health insurance
- Employer's liability / workers' compensation
Principles of Insurance
- Insurable interest: the insured must stand to lose.
- Utmost good faith: full disclosure of facts.
- Indemnity: compensation only for actual loss.
- Subrogation: insurer takes over the insured's rights after paying.
- Contribution: when insured with many insurers, each pays a share.
- Proximate cause: the loss must be caused by an insured risk.
Importance of Insurance
- Gives security to the farmer.
- Encourages banks to give credit.
- Promotes investment.
- Reduces financial shocks.