value chain finance

Value Chain Finance (VCF)

Resource person:Lisette van Benthum - FSAS

Value Chain Finance

– What is VCF?– Which actors are involved in

VCF?– Priorities in VCF– Specific Financial Products for

VCF– Role of ICCO

Value chain finance refers to:- financial products and services- that flow to or through any point in a value chain- in order to increase returns on investment,

growth and competitiveness of that value chain.

Source image: KIT – Value Chain Finance – adapted by FSAS

Source definition: MicroLinks

The Challenge: the Missing MiddleCommercial

Large Scale

Agriculture

Family

Farming

Value Chain VolumeNumber of Farmers

Fully Commercial Value Chains

Emerging Value Chains

SubsistenceMicrofinance

International Banks

Social Lenders

Local Mainstream Banks

Capacity Building&

VC Development

Producer

Organisations &

(start-up) SME’s

Smallholders

Corporates

Rural MF

Social Lenders

Missing Middle

Reasons for existence of the Missing Middle & Challenges in Rural Micro

Finance

- Perceived risk (agriculture – start-ups)- No collateral- No solid equity base- Lack of (long term) trade relationships- High transaction costs- Product characteristics do not meet

demand characteristics- Subsidized financial services

Priorities in VCF1. Stimulate mainstream financial institutions to

provide financial services to value chain actors.

(matchmaking, risk-rating, product development, temporarily reduce risk through partial guarantees, etc.)

2. Securing market linkages & risk mitigation

(Value Chain Development, cap building in handling price, production & marketing risks & development of insurance products).

3. Temporary provision of debt financing to value chain actors by social lenders and/or donors.(Oikocredit, Triodos STF, ICCO, etc. – equity, loans, participations)

Financial Product development for VC-

lending• Type of financial need • Period of financial need • Possibilities for repayment in line

with business character• Securities demanded• Processing speed of loan

application• Speed of loan release• Complexity of loan documentation

For which activity Financial Needs ?

Assets

Harvest buying

Capacity building

Inputs and/or land preparation

Household costs (f.i. education/health) in pre-

harvest season

Equity Investment

Short-term Loan on-lended

through cooperative

Trade Loan – Short term

Grant

Long term loan

Short-term loan

Short-term loan

Loan

for

Exp

Loa

n P

ortfo

lio

Gua

rant

ee

Type of Fin Instrument

Examples of Specific Adapted VCF Products

Trade Finance (Purchase Order loan)

Examples of Specific Adapted VCF Products

WarehouseReceiptSystems & Leasing

Examples of Specific Adapted VCF Products

Coop as inter-mediate for

MFI lending toindividualfarmers

Challenge for donors inValue Chain Finance

Determine ways to support value chain finance without undermining private-sector solutions.

– Interventions should be geared toward facilitating private-sector solutions,

– Addressing market failures and– Ensuring a functioning enabling

environment – Not becoming a player within the value

chain itself.

Role of donors & facilitators in

Value Chain Finance

1. Facilitate information flow from the value chain to financial markets and vice versa.

2. Introduce and link Value Chain Actors to financial institutions

3. Identify risk reduction methods or products

4. Enable training and technical assistance to value chain facilitators

5. Stimulate suitable & affordable financial product development

ICCO’s Role – Missing Middle

Stimulate Financial Services Providers- Stimulate local FS providers to service ICCO

FED-partners (match making, risk rating, risk mitigation, information flow, product development)

- Stimulate social FS providers like Oikocredit, Triodos Sustainable Trade Fund and Annona to service ICCO FED-partners.

- Loans, Guarantees, Participations

Enabling environment for Value Chain Finance- Stimulate development of risk rating, risk

mitigation methods, measures and products- Facilitate capacity building and tools for sound

business economic management by the value chain actors

- Stimulate information flow about opportunities in specific agricultural sectors to the local financial sector.

ICCO’s Role - Micro Finance

- Train staff of MFI’s on VC analysis and VC Finance

- Support product development/testing for lower part of VC

- Engage MFI’s in stakeholder collaboration for value chain with clear role description

- Engage with network on lobby for proper enabling environment for rural loans, leasing products

Commercial

Large Scale

Agriculture

Family

Farming

Value Chain Volume

Fully Commercial Value Chains

Emerging Value Chains

SubsistenceMicrofinance

International Banks

Social Lenders

Local Mainstream Banks

Capacity Building&

VC Development

Producer

Organisations &

(start-up) SME’s

Smallholders

Corporates

Chain Responsibility

Local Banks

ICCO’s Financial Instruments

Guarantees to loans (# 106 active guar = 10,5 million €)

Loans (# 13 loans = 2.5 million €)

Participations (#10 part = 2.1 million €)

Seed Capital Grants

Grants

• Entities which, through their core-activities, generate revenue.

• Those entities which aim to and are likely to become financially self sustainable through their own economic activities in a reasonable time-frame.

• Those entities that through their core-business have large developmental impact

Target Entities

Challenge for donors inValue Chain Finance

Determine ways to support value chain finance without undermining private-sector solutions.

– Interventions should be geared toward facilitating private-sector solutions,

– Addressing market failures and– Ensuring a functioning enabling

environment – Not becoming a player within the value

chain itself.

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