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

By form: cash credit and credit in kind (inputs). By security: secured (collateral) and unsecured.

2. Sources of Credit

1. Commercial banks
2. Agricultural Finance Corporation (AFC)
3. SACCOs and cooperative societies
4. Microfinance institutions
5. Government and youth/women funds
6. Input suppliers (credit in kind)
7. Friends, relatives and merry-go-rounds
8. 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)

1. Character and repayment record.
2. Repayment capacity (farm income).
3. Security (collateral such as a title deed).
4. Purpose of the loan and viability of the project.
5. Management skills and records.
6. 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

1. Insurable interest: the insured must stand to lose.
2. Utmost good faith: full disclosure of facts.
3. Indemnity: compensation only for actual loss.
4. Subrogation: insurer takes over the insured's rights after paying.
5. Contribution: when insured with many insurers, each pays a share.
6. 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.