Enhancing Microfinance Using Index-Based Risk-Transfer Products

While significant progress in microcredit and microfinance has been made in low-income countries, lending for small farming enterprises has been limited. This article reviews how innovative index-based risk-transfer products (IBRTPs) can be used to transfer the correlated natural disaster risks that often hamper the development of farm-level microcredit. By linking lending to IBRTPs, access to microcredit can be enhanced while also providing opportunities to offer mutual sharing of the basis risk that remains after correlated risks are transferred into global markets. This opens the way for new thinking about developing agricultural insurance in low-income countries.