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Advancing climate-smart financial solutions for smallholder farmers: Lessons from the CGIAR Climate Resilience Initiative

Attachments

Anne G. Timu, Alice Laborte, Emmanuel Attoh, Enock Kikulwe, Paul Kiundu, Zhe Guo, Brian Mayanja, Anthony Mbithi, Murat Sartas, Shalika Vyas, Liangzhi You

Abstract

Smallholder farmers in low- and middle-income countries face climate-related risks that increase their income volatility and compromise their well-being. The CGIAR Research Initiative on Climate Resilience (ClimBeR) has developed and implemented a suite of innovative instruments aimed at transforming the climate adaptation capacity of smallholder farmers. This brief examines the potential of these bundled financial solutions in enhancing smallholder farmers' resilience to climate risks and documents ClimBeR's experience in implementing and scaling these instruments.

1. Background

Smallholder farmers in many low- and middle-income countries (LMICs) face a myriad of production and marketing risks that lead to income volatility and compromised well-being. These challenges are intensified by climate variability and change, which increases the frequency and severity of risks such as changes in temperature and precipitation patterns, and more frequent and extreme weather events. Climate disruptions impact agricultural productivity, resulting in long-term negative consequences on household food security, food prices, and child nutrition (Paparrizos et al. 2021; Ringler et al. 2010). The vulnerability of smallholder farmers is further exacerbated by their heavy reliance on rain-fed agriculture, underdeveloped commodity, and financial markets, and limited capacity to adopt improved and resilience-enhancing farm technologies (Knox et al. 2012; Tol, 2018). Current projections indicate that by 2050, nearly 80 percent of smallholder farmers worldwide will be affected by at least one climate hazard (Niles and Brown, 2017). The impacts of climate change are not uniform across households in LMICs, research shows that women and their dependents are highly vulnerable due to their lower asset ownership and control, disproportionately enormous burden of domestic responsibilities, and heavy reliance on natural resources (Kakota et al. 2011).

Improving smallholder farmers' capacity to adapt to, and cope with climate-related risks can substantially enhance their welfare and support them in building long-term resilience to climate shocks (Sargani et al. 2023; Ngoma et al. 2024). The use of new and improved production technologies, such as better seeds or machinery or better farm infrastructure, provides an avenue to increase farmers’ resilience and improve farm incomes. Yet many farmers lack sufficient access to credit to purchase these technologies, either because they do not have the required collateral for credit, or the interest rate of the credit is too high due to information asymmetries in the prevailing underdeveloped financial markets. Transferring some of the production risks to insurance markets can also enhance smallholder farmers’ risk management ability and their resilience to climatic shocks, however, insurance markets are either missing or incomplete in many LMICs.

To address some of these needs, the CGIAR Research Initiative on Climate Resilience (ClimBeR) 1 has developed and implemented a suite of innovative instruments that are aimed at transforming the climate adaptation capacity of smallholder farmers in LMICs. A larger component of the ClimBeR initiative involves employing locally suited, and tailored agricultural risk management strategies that could effectively reduce smallholder farmers’ vulnerability to climate risks. These include, but are not limited to, bundled financial solutions that are aimed at enabling farmers to invest in improved and resilient production technologies, while also allowing them to transfer some of their risks to insurance markets. Additionally, ClimBeR provides early warning systems and climate information services that allow farmers to better anticipate extreme climate events and make informed decisions. This policy brief aims to provide insights into the potential of these bundled financial solutions in transforming rural economies and identifying key factors that can contribute to their long-term viability and expansion in LMICs. Focusing on three technologies—risk contingent credit, climate-credit scoring tools, and agricultural insurance we document the experience of ClimBeR in implementing and attempting to scale the bundled financial solutions.