Can digitally-enabled financial instruments secure an inclusive agricultural transformation?

Abstract

Research shows that risk management will be key if an agricultural transformation that includes the smallholder farm sector is to occur in sub-Saharan Africa and South Asia. While the smallholder farm sector has historically had poor access to financial and other risk management tools, digital technologies are rapidly impacting the cost and availability of savings, credit, and insurance services in remote rural regions. While these services are all different ways of moving money through time, and thus would seem to be substitutes for each other, they are characterized by quite different pre-requisites in terms of trust and understanding, and in terms of required tangible and reputational assets. This observation suggests that resilience and an inclusive agricultural transformation might be best promoted by a flexible system that offers indexed risk management tools that can meet the needs of households that enjoy different assets and beliefs. This article lays out this logic and models the use and impacts of a system of flexible financial tools for risk management and an inclusive agricultural transformation. Key findings include that farmers will optimally combine all three financial instruments. The model also shows that these combined financial risk management tools are by themselves sufficient to induce agricultural intensification for less poor, but not for the deeply poor households who have already been decapitalized by shocks.