Researchers developed an agricultural loan product in coordination with MRB that had an insurance component that partially indemnified farmers against low crop prices. Specifically, if crop prices at harvest dropped below a set price floor (the 10th percentile of historical prices for eggplant and the 7th percentile for historical maize prices), the bank would forgive 50 percent of the loan and interest payments. Borrowers were not required to pay any premium for the insurance product. The goal of incorporating insurance into the loan product was to reduce farmers’ risk in borrowing to invest in agriculture inputs. The intervention targeted maize and eggplant farmers in particular because the crops are both commonly grown in the region and subject to volatile (but historically well documented) prices.
Standard Mumuadu procedure is to invite farmers to meet in a group with Mumuadu employees to discuss the bank’s financial services, and to encourage farmers to come to a branch to apply for a loan. The average loan size is approximately US$159, which represents a significant change in cash flow for the borrower. For this project, Mumuadu employees approached community leaders to obtain a list of all maize and eggplant farmers in the village. The same community leaders then invited farmers to attend one of the bank’s information sessions. Farmers on the list were randomly assigned to one of four groups, each of which received a variation on the Mumuadu marketing pitch. The four groups were:
- Farmers who were offered the standard Mumuadu loan product;
- Farmers who were offered the Mumuadu loan product with complimentary crop price insurance;
- Farmers who received financial literacy training, before being offered the standard Mumuadu loan product;
- Farmers who received financial literacy training, before being offered the Mumuadu loan product with complimentary crop price insurance.
Prior to the marketing of the loans, Mumuadu employees conducted a survey of the farmers, gathering information relating to their credit history, risk perception, financial management skills, and cognitive ability. An analysis of baseline data, bank administrative data, and a followup survey that focused on farmer investment decisions allowed researchers to draw conclusions on the effect of crop price insurance on borrower behavior and agricultural investment in Ghana.