China

How can Microfinance really unfold its full potential? One way is by targeting entire value-chains and connections between actors rather than only focusing on individual entities within that chain. This is approach is called value chain finance – a set of tools which can be applied not only to the field of Microfinance.

An agricultural value chain refers to the systems of people, organizations and activities, which create, process and deliver agricultural products from farmers to consumers. Microfinance is especially relevant for financing seasonal activities, in that it for example provides smallholder farmers with credits to purchase input material that later generate yields.
Value Chain Finance “[…] is any or all of the financial services, products and support services flowing to and/or through a value chain to address the needs and constraints of those involved in that chain, be it a need to access finance, secure sales, procure products, reduce risk and/or improve efficiency within the chain.”[2]
Value Chain Finance is therefore a systemic approach rather than one which places a single individual entity at its core. The goal is to design financial products and services which increase the actors’ returns, while simultaneously growing and increasing competitiveness of the value chain as a whole.

In agricultural value chain finance the approach aims for an integration of the various players in the input, supply, processing, production and distribution chain. Agricultural value chain finance in rural regions is useful to support individual farmers, especially in poor countries where smallholder farming is the dominant form of subsistence. It offers a range of tools and mechanisms to tackle these challenges. Some of these tools and approaches help in the screening of borrowers, disbursing and repaying loans, reducing risks creating guarantees, insurances and collaterals to and among value chain actors, as well formatting strategic alliances.

Rabobank

In this chain based financing the banker is required to understand the business and the processes in its entirety. One example is Rabobank, a Dutch multinational banking and financial services company. It is one of the most important banks in food and agri-financing as well as sustainability-oriented banking.[3]

An example in the book “Agricultural Value Chain Finance “ by Calvin Miller and Linda Jones sums up an extensive case of integration of a financial intermediary in a value chain.

“In the case of flower producers in Mexico, Rabobank finances their needs for working capital, equipment and technology. Closely aligned with this, Rabobank also finances the equipment distributor who provides needed technology to the farmers. The bank finances the farmers because the bank knows them and understands their marketing system. In fact, the farmers send their products to an auction market in Holland, and Rabobank finances the auction market and many of the buyers in the market. In this way, the bank has locked up the financing of the whole chain and has intimate knowledge of the chain – production factors, equipment suppliers, and buyers. The bank also knows that the farmers receive their money as it is deposited in a Rabobank account, so that the bank can directly debit their accounts for loan payments.” [4]

Another example of a completely different way of supporting a value chain is done by marketing and processing companies who offer finance while connecting farmers to markets. Under this model, marketer and producer work together and share risks and benefits. Chestnut Hill Farms are growers, importers, marketers, and distributors of produce grown in diverse locations throughout Latin America with its main market being supermarket chains in the United States. They praise themselves for having “a vertically integrated supply chain, worldwide distribution capabilities”. [5] Chestnut Hill Farms focuses on a number of sustainable farming practices, mainly by providing agricultural inputs, while participating in investments in equipment, infrastructure and materials. Additionally the company gives financial advances to farmers. A budget is drafted before the planting that allows to estimate expenses. The money is disbursed gradually as planting progresses. Funds to farmers are delivered against shipping documents, once products have arrived safely. [6]

Chestnut Hill


There are a wide range of supporting services that are trying to increase the efficiency of the value chain. Especially in the technology sector there are many possibilities. Agrilife, for example, is a cloud-based platform from Kenia that helps financial institutions enter the agricultural sector by enabling agricultural data collection and sharing among producers, buyers, and financial institutions. Even though this is not a direct financing of the players, the introduction of the technology allows a better direction of the flow of finances.[7] There are other platforms that offer webinars with the goal of increasing the knowledge of the individual players that should come to the benefit of the value chain as a whole. [8]


Links:

[1] www.ifm.eng.cam.ac.uk
[2] & [4] www.fao.org/
[3] www.rabobank.com/
[5] www.chfusa.com/
[6] www.fao.org/
[7] www.agrilife.co.ke/
[8] www.agrifinfacility.org/

Effective Forms Of Microfinance – Value Chain Finance

2 thoughts on “Effective Forms Of Microfinance – Value Chain Finance

  • June 17, 2016 at 2:55 am
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    Useful info. Fortunate me I found your website by chance, and I’m stunned why this coincidence did not took place earlier! I bookmarked it.

    Reply

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