breakfast 4

8/6/2019 Breakfast 4

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THE VALUE CHAIN FRAMEWORK ANDRURAL FINANCE

Bob Fries ACDI/VOCAAnicca Jansen USAID

9/15/05


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KEY MESSAGES

1. The Value Chain Framework is useful for expanding financial services , not just for enterprisedevelopment.

2. Value Chain Finance is not new . Can you believeits happened without us?

3. Financial institutions can learn from and engagemore with value chain actors in order to develop new products and reach new markets .


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Financial (crosscutting)

Sector-specificproviders

Cross-cutting

providers

ProducersProducers

National

Retailers

Processors/Traders

GlobalRetailers

Input Suppliers

WHAT IS A VALUE CHAIN?

WholesalersExporters


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ProducersProducers

National

Retailers

GlobalRetailers

Input Suppliers

BANKS

FINANCING VALUE CHAINSBY FINANCIAL INSTITUTIONS

BANKS

BANKSCREDIT UNIONS

Non-Bank Financial Inst.

BANKSCREDIT UNIONS

NBFIsMicroFinance NGOs


Processors/Traders


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Current

Potential

Medium/Large- Scale Exporters

Producer Association

Wholesalers

InternationalMarket

GETTING A MORE COMPLETE PICTUREHORTICULTURE SUBSECTOR: ALBANIA

Smallholder Producers

Input Suppliers

(seeds , pesticides , fertilizers)

Retailers /Local Market

Processors

CommercialBanks

CommercialBanks

CommercialBanks

MFIs , family &friends , personal

savings


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ProducersProducers

Exporters

National

Retailers

Processors/Traders

GlobalRetailers

Input Suppliers

Overdrafts/ lines of credit

Investments, loans or savings to fundupgrading

Working capital topurchase inputs or products

Seasonal productionloans

VALUE CHAIN FRAMEWORK AND FINANCE

Financial Services

Wholesalers


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FinancialService

Providers

BARRIERS TO ENTERING THE RURAL MARKET

Producers

x

Costs and Risks

D ispersed marketCost of infrastructure , communication andinformation

Seasonality

Shared production andprice risks

H istoric Subsidies

Limited collateral


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VALUE CHAIN FINANCE - THREE EXAMPLES

Contract Farming/Outgrower Schemes

Loans linked topurchase

agreements

High value

Trader Credit

Loan between

buyer and seller

Grains and high value

WarehouseReceipts

Loans backed byreceipts issued by

safe, secure

warehouse


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ProducersProducers

National

Retailers

Processors/Traders

GlobalRetailers

VALUE CHAIN FINANCE - TRADER CREDIT

Benefits

Inputs and product sales

H igher yields

Bulk input purchases

T ap future production for collateral

LearningB usiness information used to screen customers

Lessons for Financial Sector

Loan terms and structure reflecteconomic activity

Financial Sector can increase trader creditthrough loans to larger VC actors


Input Suppliers


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VALUE CHAIN FINANCE - OUTGROWER SCHEMES

ProducersProducers

National

Retailers

GlobalRetailers


Benefits

More secure product and market

H igher yields and quality

Bulk input purchases & product sales

Contracts for collateral, loan and salesterms, and product specs

Learning

Business relations screen ,

train and monitor customers

Input Suppliers

Processors/Traders

Lessons for Financial Sector

Loan terms and structure reflecteconomic activity

Financial Sector can increase trader credit through loans to larger VC actors


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ProducersProducersProducersProducers

VALUE CHAIN FINANCE - WAREHOUSE RECEIPTS

Producers

Processors/Traders

Benefits

Extended sales season , higher prices , lower losses

Bulk sales , sight-unseentransactions

C ollateral based on secure product,

legal receipts

LearningG rading standards

R eceipts provide screening and security to banks

WarehouseReceiptBank


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VALUE CHAIN FINANCELIMITS & POWER RELATIONSHIPS

Exploitative pricing Cotton in G hana

Trader competition Traders in ZimbabweMarket information Tea in Kenya

EnablingEnvironment

Trust Enforceablecontracts

Significantlegislative/regulatory changes

LIMITS Trader Credit

ContractFarming

WarehouseReceipts

Monopoly/ Unfair Pricing

Checked by marketinfo and trader competition

Checked by need for reliable product

Without warehousestandards andinspection

Side-Selling Frequent, creatinghigh default risk

Less options due tocloser monitoring

No. Product alreadydeposited

Power / Learning / BenefitPower / Learning / Benefit


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VALUE CHAIN ACTORS & FINANCIAL INSTITUTIONSCOMPLEMENTARY ROLES

Vertical transactionsMake money on VC productsPresence and depth of outreachTerms , conditions and risk/costmanagement fit economic activity

Working capital to smaller players

Embedded financial services lower marginal costs , productionand marketing benefits

H orizontal transactionsFinancial products

O utreach PotentialSound financialpractices andtechnologyWorking capital tolarger players , investment capitalEfficiency of unbundledservices

Rural Finance Through.

Value Chain Actors Financial Institutions


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Q UESTIONS?

[email protected]@usaid.gov

This presentation is based on the paper,Value Chains and Their Significance for Addressing the Rural Finance Challenge

http://www.microlinks.org


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IN CONCLUSION: TO EXPAND RURAL FINANCE ANDENTERPRISE GROWTH

Think outside between the box es

x

Clients

Financial Market Assessment Value Chain Analysis

Financial Institutions Buyers and Processors

Financial Sustainability Economic Growth

Financial Intermediation Embedded Services

Banks and Producers Banks and Processors

Investment Loans Upgrading

Cost recovery & risk management Competitiveness

Financial Market Assessment Value Chain Analysis

Financial Institutions Buyers and Processors

Financial Sustainability Economic Growth

Financial Intermediation Embedded Services

Banks and Producers Banks and Processors

Investment Loans Upgrading

Cost recovery & risk management Competitiveness


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THANK YOU

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