Adoption of Rainwater Harvesting Tanks in Kenya

Researchers examined the effect of collateralized loans on the adoption of rainwater harvesting tanks and subsequent impacts on dairy production, time use, or girls’ enrollment in school.

Over the last decade, billions of dollars have been invested in the development of new agricultural technologies, which have the potential to contribute to economic growth and poverty alleviation amongst the poor. However, in Sub-Saharan Africa, the adoption of these promising agriculture technologies has been limited. Low adoption rates may be explained in part by credit constraints, which prevent many smallholder farmers from making the often large, initial investment in a new technology. A sizeable initial deposit or a guarantor is often required to receive a loan, restricting access for most. In developed countries, guarantor requirements are uncommon; instead, loans for purchase of houses, vehicles, and small business equipment often use the assets themselves as loan collateral. Using assets as collateral is rare in developing countries, where credible and efficient institutions and processes to seize collateral may be lacking. But in certain environments or for certain products—like water tanks, which are large and difficult to hide or relocate, making repossession feasible—can asset collateralization expand access to credit without affecting repayment rates?
Context of the Evaluation:

Almost 80 percent of the Kenyan population lives in rural areas, where many suffer from significant water constraints. About 96 percent of cropland in Kenya is rain-fed and the rains are both seasonal and unpredictable. In recent years, much of rural Kenya has been hit by extreme droughts, which can be particularly problematic for dairy cattle, which require a consistent and regular water supply. Dairy farming is common in Kenya’s Central and Rift Valley provinces, the sample area for this study. The smallholder dairy farmers in the study sample had an average herd size of two cows, but 32 percent of households reported losing at least one cow to drought in the year prior to the study, and 52 percent of households had a cow get sick. Without easy access to water, sample farmers reported spending a considerable amount of time (ten hours per week) taking cows to a water source. Technologies, such as rainwater harvesting tanks, that help to give dairy farmers reliable and convenient access to water, could improve their productivity and other economic outcomes.

Take-up rates: Take up of the 100 percent secured joint-liability loan was low, with only 2.4 percent accepting the offer. Asset collateralization significantly increased take up—nearly 28 percent of those who received the 25 percent deposit loan offer accepted, 23.5 percent of those who received the 25 percent guarantor offer accepted, and 44 percent of those who received the 4 percent deposit offer accepted.

Loan repayment rates and timing: About 63 percent of the farmers who took out a loan were late on their payments at least once during the course of the loan, but repayment performance did not vary significantly between treatment groups. The only major difference was the time taken to repay the loan: the average time taken to repay the 100 percent joint-liability loan was only nine months, while the other loans took between 17 and 22 months to pay off. No farmers defaulted on their loans and no tanks were repossessed. These preliminary results suggest that access to credit can be improved at little cost to lenders.

Impact on economic and welfare outcomes: Preliminary results show that access to asset-collateralized loans (through the 4 percent deposit offer) improved milk production specifically for those without access to piped water before the start of the study. In addition, it reduced the time girls in treatment households spent fetching water by 35 percent, and increased the probability that girls were enrolled in school by 4 percentage points. This latter effect is striking because enrollment rates in the sample area were already high—girls’ enrollment at baseline was 94.6 percent. This was not the result of households being able to borrow to pay school fees (a common use of microfinance loans), but rather the ability to invest in an asset that reduced the demands on girls’ time.