Joey A. Bermudez Chairman, Maybridge Financial Group Managing Risks in Rural Finance A Value Chain Perspective

The ultimate risks in rural finance are the risks that: (a) exposures may not be recovered and/or (b) exposures may not be properly priced. Both events will render the lending activity unprofitable in the short run and unsustainable in the long run.

Lessons from the past The risks in rural finance will be unwieldy as long as value chains are weak. A value chain is only as strong as its weakest link. A value chain can be enhanced or damaged by the external environment. Value chain financing requires a healthy risk appetite supported by the required skills set and a robust infrastructure

Manageable Risks in Rural Finance Strong Value Chains Failed value chains “actualize” risks Credit enhancements and maverick structures are myopic solutions. Weak value chains turn off supply. The truth and nothing but the truth

Weak Value Chains Weakest link: Capability not aligned with the rest of the actors No strategic commitment by the players; hence, inconsistency and under-investment in the chain Misuse and abuse of market power; hence, under- development of the weakest link

The impact of the environment Inappropriate policy response; hence, market distortions Absence of “contract” culture; hence, no integrity in commercial arrangements Hostile macro-economic and natural environment; hence uncompetitive value chains Vulnerable institutional arrangements

Risk appetite, skills and infrastructure Appetite is short; so is expertise and capabilities Infrastructure is inadequate; technology is not fully deployed Information is asymmetric; not enough effort to use data to manage risks Financial position of lender is impaired

Recommendations Start operating CISA! Enrich the data by using information accumulated by the key players in the value chain! Private institutions must develop expertise, build capability and strengthen their risk management infrastructure. Soundly-managed rural financial institutions should scale up; badly-managed ones should not be saved with taxpayers’ money

Recommendations Focus on strengthening the weakest link in the chain, not “babying” it! Only “strategic” value chains with committed players should be encouraged.

Recommendations Government Focus intervention on capacity-building Check abuse of market power in the value chain Foster a macro-economic environment that encourages investment and ensures fair play Formulate rules that ensure the integrity of commercial arrangements and reduce the vulnerability of institutional arrangements

Alcoy Coffee Project CHMI Agro-Forest Development Corporation Strong Value Chains: Example