Risk Management Challenges in Rural Financial Markets: Blending Risk Management Innovations with Rural Finance

This document was one of the leading documents for the seminar called Paving the Way Forward for Rural Finance, organized by the USAID, BASIS-CRSP and WOCCU. On this paper the author emphasizes the difficulties of risk management and risk coping in the rural areas of developing countries. The paper mentions how banking and insurance are used to manage and cope with risk; it also highlights problems that are presented in the case of the traditional crop insurance.

The paper reviews the innovations in global financial markets that provide opportunities for the rural finance institutions to manage correlated risk and expand their ability to reach rural households. The two major innovations explained on the paper are:

  • The use of global futures markets by intermediaries who can offer a form of price insurance; and
  • The use of index insurance contracts to shift natural disaster risk into global markets.

The paper presents different country case examples and how they use the index insurance. These cases are:

  • Mexico: use of water index insurance for mutual insurance, reinsurance and to facilitate water markets.
  • Mongolia: use livestock mortality rates as index insurance to cover deaths of large numbers of animals.
  • Uganda: rural bank use of weather index insurance for bank customers.
  • India: a case of microfinance insurance (BASIX)
  • Kenya: the potential for using coffee futures markets for price risk management

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