This paper aims at exploring the possibilities to increase the satisfaction of the demand for financial services in rural areas through market based financial products allowing farmers to protect against major sources of risk. The focus is on developing economies, where farm specific and covariant risks, such as natural and weather risks and agricultural commodity price volatility, are seriously hitting the rural population and few instruments are currently available to support farmers’ protection and hedging choices. Stating, based on observation, that, besides other real and institutional constraints, risk is actually a critical bottleneck in the process of establishing efficient and effective loan contracts in rural areas, the paper deals with the identification of market based risk management strategies, products, and processes, to manage covariant risks - price and yield risks - in rural areas. After specifying the main sources of covariant risks, the paper examines the role of price and yield risk management tools able to reduce or to mitigate risks exposure of farmers. The implications for the financial institutions willing to provide financial services in rural areas are also dealt with in the final part of the paper. The paper is organised in seven chapters: chapters 1-3 discuss the reasons why market based risk management instruments and mechanisms are important in fostering and improving the bank-customer relationships in rural areas in developing countries. Chapter 4 explores such instruments, providing evidence of their application. Chapters 5 and 6 present the different institutional options to favour the access to market hedging tools by farmers analysing the advantages for the different actors. A conclusive chapter presents some future challenges on the subject.

Management of Covariant Risk in Rural Areas of Developing Economies: Opportunities and Challenges

VIGANO', Laura;
2006-01-01

Abstract

This paper aims at exploring the possibilities to increase the satisfaction of the demand for financial services in rural areas through market based financial products allowing farmers to protect against major sources of risk. The focus is on developing economies, where farm specific and covariant risks, such as natural and weather risks and agricultural commodity price volatility, are seriously hitting the rural population and few instruments are currently available to support farmers’ protection and hedging choices. Stating, based on observation, that, besides other real and institutional constraints, risk is actually a critical bottleneck in the process of establishing efficient and effective loan contracts in rural areas, the paper deals with the identification of market based risk management strategies, products, and processes, to manage covariant risks - price and yield risks - in rural areas. After specifying the main sources of covariant risks, the paper examines the role of price and yield risk management tools able to reduce or to mitigate risks exposure of farmers. The implications for the financial institutions willing to provide financial services in rural areas are also dealt with in the final part of the paper. The paper is organised in seven chapters: chapters 1-3 discuss the reasons why market based risk management instruments and mechanisms are important in fostering and improving the bank-customer relationships in rural areas in developing countries. Chapter 4 explores such instruments, providing evidence of their application. Chapters 5 and 6 present the different institutional options to favour the access to market hedging tools by farmers analysing the advantages for the different actors. A conclusive chapter presents some future challenges on the subject.
journal article - articolo
2006
Vigano', Laura; Bonomo, Luciano
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10446/19391
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