Factors Hindering Pakistani Farmers' Choices Towards Adoption of Crop Insurance

Sidra Ghazanfar, Zhang Qi-wen*, Muhammad Abdullah, Jaleel Ahmed, Imran Khan, and Zeeshan Ahmad

1College of Economics and Management, Northeast Agricultural University, Harbin 150030, China

2School of Management, Harbin Institute of Technology, Harbin 150001, China

3Department of Management Sciences, Harbin Institute of Technology, Harbin 150001, China

Factors Hindering Pakistani Farmers' Choices Towards Adoption of Crop Insurance

Sidra Ghazanfar1, Zhang Qi-wen1*, Muhammad Abdullah1, Jaleel Ahmed2, Imran Khan3, and Zeeshan Ahmad1

1College of Economics and Management, Northeast Agricultural University, Harbin 150030, China

2School of Management, Harbin Institute of Technology, Harbin 150001, China

3Department of Management Sciences, Harbin Institute of Technology, Harbin 150001, China

This study was conducted to analyze the factors that negatively influence Pakistani farmers' willingness to participate in crop insurance. Probit model was applied to identify the significant factors which influenced our dependent variable "not willing to participate". The results of the analyses showed that crop insurance premium was the most influencing factor which had positive and significant impact on dependent variable. Similarly dissatisfaction with crop loan insurance scheme, lacking of knowledge about crop insurance, believing of being against Islamic rules and time taking process was also found to be positive and significantly influenced the dependent variable. While limited decision power and limited perils were not found to be significant in the results.

crop insurance, willingness to participate, Probit model, Premium

Introduction

Pakistan is a highly climate sensitive agriculture dependent country where development and growth of the economy depend on the agriculture sector, as agriculture contributes about 21.4% to Gross Domestic Product (GDP) and engages about 45% of labor in agriculture sector (GOP, 2013). Situation of climate uncertainty in Pakistan is getting worse and worse day by day. Pakistan is exposed to a number of natural disasters, including cyclones, floods, drought, intense rainfall, and earthquakes (TFCC, 2010). Almost onethird of the households is living below the "food poverty line" and the quantity of the food available to them is not enough to meet their nutritional requirements (Arif and Khalid, 2007) and out of 120 districts, 74 are food deficit, in terms of net availability (Abid and Sahib, 2009). Water-stressed condition had increased the condition of food insecurity by reducing the agriculture productivity in arid and semi-arid areas of Pakistan (Iqbal, 2013).

Hence, the analyses of the situation demand an efficient crop insurance market in agriculture system which provides the security to agriculture production and farmers' income. Although crop insurance market exists to protect farmers from these disasters, farmers seem to be not interested in participating in crop insurance. Most farmers in Pakistan, either ignored or overweighted low probability risks which showed that farmers were more sensitive about their current outcomes rather than future income risks. There were several factors for lowing crop insurance market penetration and lowing interest of farmers towardscrop insurance, so the purpose of this study was to investigate the factors that negatively influenced, the farmers' willingness to participate for crop insurance programs.

Materials and Methods

We had collected the data from Punjab Province of Pakistan, three districts of Punjab were chosen to conduct the study, namely Dera Gazi Khan, Rajan Pur, and Bahawalpur. These districts were purposely chosen, as they were highly vulnerable to disasters of flood and drought. From each district, two tehsils were selected randomly to conduct the survey, among the farmers of these tehsils. A total of 300 farmers were selected by selecting randomly 50 farmers from each selected tehsil. Before they were asked to fill the questionnaire, a briefing was given to farmers about crop insurance scheme, just to make farmers familiar with the mechanism and benefits of the crop insurance program. A questionnaire was developed to collect the required data regarding the demographics of the farmers, their willingness to participate for a hypothetical crop insurance program and the factors that influenced their decision of the participation. Overall, 300 farmers were asked whether they were willing to participate in the given crop insurance scheme. Out of which 184 farmers responded that they were willing to participate in crop insurance and 116 farmers replied that they were not willing to participate. Those farmers, who refused to participate in the hypothetical crop insurance plan, were asked regarding the factors that influenced their decision of "not willing to participate" for the designed hypothetical crop insurance scheme. This research was an attempt to explore those factors, among the farmers in Pakistan.

Probit model

In this research, we had tried to find out the key factors which were associated with the decision of farmers who were not willing to participate in crop insurance schemes. We had used not willing to participate (NWTP) as our dependent variable. As not willing to participate was a qualitative dummy dependent variable, hence, we could not use Classical Linear Regression Model (CLRM). To avoid the problem of linear probability model of having value beyond the range of zero and one, we could use the Logit and Probit models. As, these models solved the problems of non-normality of the residuals, heteroskedasticity and a smaller R-square. Logit and Probit models produced almost the same results for large samples. In this research paper, we had used Probit model, because Asteriou and Hall (2007) had mentioned that Probit model was more sophisticated than that of Logit model. For the present study, the Probit model was specified as the following:

Where,

NWTPi=Not Willing to Participate was a dummy variable that was measured as 1 for not willing to participate and 0 otherwise.

AIRi=Believe of being Against Islamic Rules. It was measured as 1 for those who had mentioned it as against the Islamic rules and 0 otherwise.

DISi=Dissatisfaction of the farmers was a dummy variable. 1 for dissatisfied farmers and 0 otherwise.

INAi=Inaccessibility was a dichotomous dummy variable that was 1 for those farmers who had not access to insurance schemes otherwise 0.

KISi=Knowledge about Insurance Schemes was a dichotomous dummy variable that was 1 for those farmers who had knowledge about insurance schemes otherwise 0.

LDPi=Limited Decision Power was also a dummy variable.

LPi=Limited Perils was a dummy variable.

PCi=Premium Cost was a dummy variable. 1 for those farmers who didn't want to involve/participate in insurance schemes due to the high premium 0 otherwise.

TTPi=Time Taking Process was a dummy variable. 1for those farmers which had the opinion that insurance schemes had time taking processes 0 otherwise.

Agei=Age of a farmer.

εi=An error term.

Results

Descriptive statistics

In our study analysis, the age distribution scale of our selected sample ranged from minimum 22 to maximum 70 years, with an average age of 43 years. Education level was found to be low among our sample as the average number of educational years was found to be eight years. Household size always remained a massive variable to measure in agricultural research. The household distribution of our sample ranged from two to nine family members, with an average size of five members in a family. Farm income was calculated in Pakistani Rupees and average farm income was found to be 193 793.9 (Table 1).

Table 1　Descriptive statistics

Land holding distribution ranged from 2-20 acres for sample, with an average size of 7.8 acres of land. About 40% of respondents had 1-5 acres of land, 47.6% of farmers had 6-10 acres of land, 6.8% of responding famers had 11-15 acres and 5.6% of farmers had more than 15 acres of land. Most responding farmers of sample were small farmers, because about 90% of farmers in Pakistan were small farmers (GOP, 2010). And 23.6% of farmers had nonfarm income sources, while the remaining farmers did not earn non-farm income.

The analysis showed that although majority of farmers about 61.34% were willing to participate in crop insurance, but there still existed enough percentage of farmers, about 38.66% who were not willing to participate, which was not a neglect able percentage of the farmers that should be ignored. There could be a lot of reasons for not to participate in insurance schemes, one of the major reasons, which the farmers mentioned during our survey was to consider insurance schemes against the Islamic jurisprudence. Almost 45% of the farmers replied that these insurance schemes were not according to Islamic laws. Another important reason was the price of the crop insurance, and 60% of the farmers considered that their participation in crop insurance would result an increases in their total cost of the production. Limited power to make decision was also found to be a major influencing factor as in Pakistan families were usually large and combine family system was common, so decisions were made under the consultancy of other family members. Decisions are made by seeking coordination from the other family members who were usually senior in age and experience, so the consent of other family members was usually required to make decisions. Similarly, lacking of proper information about the crop insurancemechanism and benefits and time taking process were found to be important reasons behind not participating in crop insurance. The frequency distribution of these factors is shown in Table 2.

Table 2　Frequency distribution

Table 3　Results of Probit model

Table 3 represented the results of the estimated Probit model which was applied to analyze the influence of above mentioned factors on farmers' decision of "not willing to participate" (NWTP) in crop insurance. Almost 98% population of Pakistan was Muslim. In the religion of Islam, the interest was strictly forbidden, so most of the farmers do not believe in conventional banking as well as in insurance schemes. We had found that our first independent variable "Against Islamic Rule (AIR)" was positively and significantly related to our dependent variable "NWTP". This could also be one of the reasons behind dissatisfaction of farmers with currently running crop loan insurance scheme. Crop loan insurance scheme was a mandatory program, all the farmers whether they were interested or not, if avail agriculture credit loan from banks, their farms got insured, under this crop loan insurance scheme. Therefore, dissatisfaction with crop loan insurance scheme was also found to be positively and significantly related to not willing to participate in crop insurance.

Discussion

Lacking of proper knowledge about crop insurance concepts, its features and benefits were found to be one of the important factors that negatively influenced farmers' willingness to participate in crop insurance program. Farmers perceived it was difficult to understand about the procedures, policies and risk management mechanism of crop insurance. Low literacy rate among farmers was one of the reasons thatmade it was difficult for farmers to understand the concept of formal risk management measures, such as crop insurance schemes that was why lacking of Knowledge about Insurance Schemes (KIS) was also positively and significantly related with not willing to participate in crop insurance.

A positive but insignificant relationship had been found between Limited Decision Power (LDP) and not willing to participate in crop insurance. Limited Decision Power (LDP) and coverage to limited perils were found to be insignificantly related with dependent variable (NWTP), not willing to participate.

During our survey the main thing that we realized was the hesitation of farmers to pay premium cost. Premium Cost (PC) was the only independent variable which had a massive impact on dependent variable. Premium cost was positively and highly significantly related with not willing to participate in crop insurance. Poverty was one of the reasons behind this attitude of the farmers towards premium cost. Agriculture sector in Pakistan was dominated by small farmers (less than 12.5 acres land holdings) and almost 90% farmers were small (GOP, 2010). Large family size, dependence on single earning hand, high inflation rate, frequent natural hazards and income loss and small farms were the reasons which usually forced the farmers to consider premium as an extra cost of production.

Farmers believed that processes of getting insurance, claiming losses and receiving compensation were time consuming. Especially, the provision of services for loss assessment and the delivery of the compensation (payment) would not be done in an efficient way and they might not be able to get compensation in time of need. Moreover, poor farmers also believed that rich farmers would be served quickly and poor farmers would be ignored. That was why the variable "time taking process" was found to have a positive and significant influence on our dependent variable "not willing to pay".

Conclusions

The analyses revealed that low literacy, improper knowledge about crop insurance and premium were the major constraints in the way of adoption of crop insurance market in Pakistan. However, these issues could be handled efficiently by coordination of government, insurance agencies and media. Government should make efforts to promote crop insurance under provision of subsidy. Electronic media could be utilized to disseminate the information regarding the functions/ benefits of the crop insurance in the regional languages. Agricultural extension agents could also be a good source of not only creating awareness, among farmers regarding crop insurance, but also to remove the dissonances about crop insurance in the minds of farmers.

References

Abid Q S, Sahib H. 2009. Food insecurity in Pakistan. Sustainable Development Policy Institute, World Food Program and Swiss Development Cooperation, Pakistan. pp. 103-104.

Arif M, Khalid N. 2007. Agriculture and food security in Pakistan. South Asia Partnership, Pakistan. pp. 16-17.

Asteriou D, Hall S G. 2007. Applied econometrics: a modern approach using eviews and microfit. Palgrave Macmillan, New York. pp. 197-217.

GOP. 2010. Agriculture statistics of Pakistan, Ministry of Food Agriculture: Islamabad, Pakistan. http://www.pbs.gov.pk/content/ agriculture-statistics-pakistan-2010-11.

GOP. 2013. Pakistan economic survey 2012–2013. http://www.finance. gov.pk/survey_1213.html.

Iqbal M M. 2013. Climate change impacts on agriculture and building resilience in Pakistan. Workshop on developing farming system for climate change mitigation, Colombo Sri Lanka. http://www.adbi.org/ files/2013.08.29.cpp.sess7.7.country.ppr.pakistan.pdf.

TFCC. 2010. Task force on climate change. http://www.pc.gov.pk/ usefull%20links/Taskforces/TFCC%20Final%20Report.pdf.

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F310 Document code: A Article ID: 1006-8104(2015)-02-0092-05

11 December 2014

Sidra Ghazanfar (1986-), female, researcher, Ph. D, engaged in the research of crop insurance in Pakistan. E-mail: neau2011@outlook.com

. Zhang Qi-wen, professor, supervisor of Ph. D student, engaged in the research of financial theory and policy. E-mail: 5390748@qq.com