Value Chain FinanceBeyond microfinance for rural entrepreneurs

Value Chain Finance WorkshopAddis Ababa24 June 2010

Amsterdam, The Netherlands www.kit.nl

The issue at stakeRural SMEs in developing countries: entrepreneurial, resilient, but not bankable…?

Amsterdam, The Netherlands www.kit.nl

Problems in financing rural SMEs• Lenders: few assets, informal management

•High transaction costs in countryside

• Lack of market information

•High risks in agriculture

•Distortion government and donor programs

• Poor repayment culture

“Too large for microfinance, too small for banks”

“The missing middle in finance”

CHAIN ACTORS

CHAIN SUPPORTERS

CHAIN CONTEXT

The value chain

Source: SNV LA

Financing the value chain

Chain liquidity

MFI Agriculturalfinance

Bank

Value chainfinance

Bank

Financing the value chain

Value Chain Finance TriangleReducing costs:

Due diligence

Monitoring

Enforcement

Cash management

Administration

Reducing risks:

Production

Price

Market

Default

Currency

Three situations of value chain finance

1. Crafting new value chains

2. Expanding chain liquidity

3. Unleashing investments

1. Crafting new chainsMarket and produce available, yet no chain. Finance linked to capacity building to develop the chain

2. Expanding chain liquidityFinancial agents link with chain actors providing working capital to finance product flow – enabling the scaling up of business

1. Lead firm strategyUse a solid lead firm as a way to reach non-bankable suppliers e.g. contract farming (“classic” Value Chain Finance)

2. Capacity building strategyBuild capacities of suppliers and build their credit history so they become bankable

3. Unleashing investments

Financial agents link with chain actors to provide investment capital enabling the upgrading of business

• Medium-term syndicate loans

• Micro leasing

• Temporary equity

Soybean Ethiopia

Remodeling risk managementBringing the business into the picture: Solidity of business rather than standard

financial ratios Future rather than the past Cash flows rather than balance sheet

The value chain as soft collateral: Sales contracts Technical assistance Group formation Product claim Savings and insurance Information flows

The chain of value chain finance Risk sharing Finance for the entire chain Reaching out to producers

Involving local banks

Key role due to proximity:

Develop sector knowledge to show the opportunity

Set-up pilots to build track record

Formalize the chain actors and develop collateral

Schemes for co-financing and risk-sharing

Key issues in Value Chain Finance

Risk sharing is key: need for cross-organizational collaboration and innovation

Added value of VCF is in reorganizing and upgrading the chain

VCF reaches beyond micro-finance

Paradox of chain integration versus creation of monopolies and exclusion

Finance versus other critical chain issues: market, knowledge, skills, collaboration, trust, policies etc.

The Value Chain Finance Book

Produced through a “Writeshop”

The “writeshop” approach is specifically designed to assist people to get the information out of their heads and onto paper

Practioners, farmers, traders, extensionists, NGO people, civil servants etc. are not necessarily good writers however they have an interesting story to tell

A writeshop is an intensive, participatory workshop where people jointly produce a practical book in easy-to-understand language

The Value Chain Finance bookProvides practical knowledge for organizations working on market development, value chains, financial services

Structure of the book:

Background Framework Cases Synthesis Resources

www.kit.nl

Cases crafting new chains:

Milk India Potato Peru Milk Bolivia Chilli Kenya

Cases chain liquidity:

Cotton Tanzania Sal leaf India Tea Kenya Rice Rwanda

Cases unleashing investments:

Honey Kenya Coffee Nicaragua Fish India Soybean Ethiopia Quinoa Bolivia

A special word of gratitudeAuthors, resource people, editors, support staffand all donors-partners:

Amsterdam, The Netherlands www.kit.nl

Thank you very much for your attention