Expanding Rural Finance to Colombia’s Impoverished Farmers

Rural finance is emerging as one of Colombia’s most pressing development challenges as the country moves toward a peace agreement to end a 50 year-long civil war and looks to provide for the impoverished rural areas, considered by many to be one of the causes of the conflict.

Helping small farmers gain access to credit and protect themselves against risk is becoming a priority for the public and private sector alike.

The World Bank Group and Bancamia, a microfinance institution, in November organized a workshop to discuss and promote agri-insurance services for small farmers.

Agri-insurance can be an essential tool to help small farmers manage risk and protect them against extreme weather risks, for example, but it is largely unknown in Colombia. 

The workshop brought together private insurance companies, government institutions, banks, donors and experts to better understand issues facing Colombian farmers and draw on lessons from international experience, including from the World Bank Group’s Global Index Insurance Facility (GIIF), which seeks to expand the use of index insurance as a risk management tool in agriculture, food security and disaster risk reduction in Africa, Latin America and Asia.

Agri-insurance will be critical to the economic survival of Bancamia’s clients and the sustainability of its portfolio, according to Maria Mercedes Gomez, President of Bancamia.

About 79% of Bancamia’s rural clients live in areas that could be impacted by severe weather events. 

Agri-insurance products can allow microfinance institutions, like Bancamia, to protect and expand relations with existing clients, provide additional finance to help them restart their activities in the event of loss and protect the quality of their overall loan portfolio. 

Workshop participants discussed the need for the Colombian government to enable private insurance companies to innovate and diversify their offerings to ensure solutions are simple, timely, cost-effective and meet farmers’ needs.

“Rural finance will be critical to Colombia’s economic future and consolidation of peace,” said Eva Gutierrez, World Bank Program Leader for Colombia. “Developing agricultural insurance is an essential piece of the puzzle to help protect producers and incentivize financial institutions to lend to the small and medium enterprises which will be the motors of rural development.”

Microfinance institutions can be ideal channels to develop and distribute agricultural micro-insurance products because they are close to their clients and understand their needs, and clients are more likely to have trusted relationships with such institutions. 

Workshop panelists also discussed the government’s role in rural finance, suggesting government support the industry by developing systems of agro-climatic information to collect, analyze and disclose data related to climate/weather and agricultural production in country.  Government was also advised to invest in infrastructure, training and consumer education, and ensure an adequate legal and regulatory framework for agri-insurance.

Government subsidies were deemed critical, but several panelists highlighted the importance of complementarity to ensure the public sector doesn’t discourage private competition but rather focuses on producers with the greatest risk profile and, therefore, the highest premiums.

Claudio Gonzales-Vega, Chairman of the Board of Trustees of the BBVA Microfinance Foundation, warned of unintended consequences of premium subsidies such as moral hazard and rent seeking. 

The state’s role is to make farmers more insurable by promoting investments in climate adaptation and mitigation and to increase farmers’ technical knowledge to address production-related risks, Gonzales-Vega said.  Insurance has to be part of other measures to promote risk adaptation in agriculture, he added.

Workshop participants also learned about innovative agricultural insurance products from Bolivia, Mexico and Peru, which use weather and area yield indexes as a proxy to determine production losses at the farm level.  Such country examples are considered successful because they rely on appropriate climate-related loss assessments, good quality data, products designed for farmers, as well as an enabling policy and institutional environment. Building on the lessons learned during the workshop, the World Bank Group will continue to support rural finance in Colombia by building partnerships between the public and private sectors and by providing technical assistance to improve the design of public policy instruments for rural insurance and credit markets. Meanwhile, IFC, the World Bank Group’s private sector-lending arm, is exploring how to distribute financial products through mobile technology and payment solutions to reduce costs. It is also supporting Bancamia, an IFC client, in developing targeted products for its clients.