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New program tackles risk three ways

Indonesian program tackles risk in three ways

Can insurance help make farming more attractive to Indonesians?

Indonesian smallholders face numerous challenges. Some can be mitigated by insurance. But as we’ve learned, risk management requires a broader approach.

In the recent past, farming was part of Indonesia’s national identity. Nowadays, however, many Indonesians view the profession as unappealing. As weather extremes increase, achieving good farm yields is becoming even more of a lottery for smallholders than it has always been. The high risk involved deters most financial institutions from supporting agricultural investments.

In early 2016, SFSA began insurance work in Indonesia. Our initial idea was to offer only agricultural weather index insurance combined with loans. However, this approach had two disadvantages. On the one hand, the arrangement was not attractive enough since it was hard for the smallholders to realize the importance of insurance in the loan package. The second drawback was that the arrangement did not help increase farm production.

Together with our partners, we, therefore, developed a new solution called ‘Dana Pandan’. The abbreviation stands for ‘Secure and Sustainable Farming Fund’. This model combines climate-based index insurance, good agricultural practice integration, including pest and disease control, and lending support from a microfinance institution (MFI). All these elements help smallholders to manage risk. With the farm inputs, Dana Pandan tackles the threat of pests and disease. The extension advice helps smallholders to farm in the most appropriate way for their local conditions. Insurance shifts the burden of weather risk from farmers’ shoulders. Knowing that clients are covered also increases the MFI’s security and willingness to lend.

Having a good offer is not enough on its own, however. Climate insurance also requires careful explanation and needs to be welcomed by all stakeholders. We therefore continuously run capacity-building events. In October 2017, Dana Pandan reached a major milestone when the first farmer signed up for the program in West Java. SFSA simultaneously devoted considerable efforts to preparing for scale-up. These included training sessions for our Indonesian insurance team. Its members hope to contribute to making farming a more attractive profession again.

Since then, our Weather Index Insurance product for rice has been developed for six regencies on Java Island. Expansion to further regencies is planned. We are exploring other ways to simplify and scale up the use of agricultural insurance for many more farmers. These efforts include identifying and developing more insurance products for current and additional crops. 

Farming activity during the pandemic

The second quarter of 2020 saw the first cases of Covid-19 in Indonesia. As the numbers grew and restriction of movement was enforced, the economy slowed down. The slump affected businesses of all sizes and their ability to repay credit. That, in turn, had an impact on the liquidity of financial service institutions.

Among the many sectors affected, agriculture proved its resilience. The agricultural insurance program in Indonesia works closely with the financial aggregators. Credit restructuring by the Financial Services authorities together with the agricultural insurance program enabled our MFI partners to distribute agricultural loans with confidence. At some MFIs, agricultural lending led their overall credit portfolio during the pandemic.  Most farmers taking out agriculture insurance and loans benefited from our Dana Pandan financial access and risk mitigation program.