Effect of index-based livestock insurance on loan uptake

Abstract

Purpose The purpose of this paper is to weigh up the effect of index-based livestock insurance (IBLI) on loan take up behavior of the pastoral households in the Borena zone of Southern Ethiopia. Although the insurance was introduced over the last decade and it appears to have promising welfare benefit, there is a lack of pragmatic evidence on its effect in leveraging the household’s future wealth for the hope of better productivity in the present. Design/methodology/approach The authors analyze household-level unique panel data collected in three rounds using descriptive statistics and the fixed effect model estimated by least squares dummy variable analysis. Findings The authors found that the IBLI appears to have a positive and significant effect on the loan uptake behavior of the herding households. Social implications This increased likelihood of loan uptake suggests that the insurance can reduce the cognitive cost of loan default that would occur due to weather shocks and build-up of the household’s confidence to uptake loan. Consequently, this likelihood can promote the creditworthiness of the insured and reduce his/her fear and worry regarding the possibility of loan delinquency. Originality/value The paper is, except where otherwise stated, entirely new work.