Researchers started with 32 localities and randomly assigned half the localities an opportunity to take out a loan to purchase high-yield maize and groundnut seeds while the other localities were offered the same package but with a requirement to purchase weather insurance alongside the loan. The insurance policy partially or fully forgave the loan in the event of poor rainfall.
Loan details: The loans for the hybrid seeds were offered based on group liability contracts for clubs of 10-20 farmers. Take-up of the loan was an individual decision, but the subset of farmers who took up the loan was told that they were jointly liable for one another’s loans.
Insurance details: The weather insurance policy was customized to each of the four project regions (Lilongwe North, Kasungu, Nkhotakota, and Mchinji). Payouts were based on the rainfall readings at the closest weather station to the individual in question, and premiums were lower in places where the likelihood of a bad rainfall shock was lower. Compared with the annual interest for the uninsured loan (27.5 percent), a farmer taking out an insured groundnut loan faced an effective interest rate ranging from 37.8 percent to 44.4 percent, depending on the area.
All farmers in the study were administered a household survey that covered income, education, assets, income-generating activities (including detailed information on crop production and crop choice), measures of risk aversion, and knowledge about financial products such as credit and insurance.