1. THE VALUE CHAIN FRAMEWORK AND RURAL FINANCE SEEP Annual Meeting
This presentation adapted from a Value Chain breakfast series presentation under AMAP.
Bob Fries ACDI/VOCA
October 2005

2. KEY MESSAGES
1.   The Value Chain Framework is useful for expanding financial services and for developing enterprises.
2.   Value Chain Finance is not new. It helps to fuel many enterprises. Can you believe it’s happened without us?
3.   Financial institutions can learn from and engage more with value chain actors in order to develop new products and reach new markets.

3. WHAT IS A VALUE CHAIN? Global Retailers National Retailers
Sector-specific providers
Exporters
Wholesalers
Cross-cutting providers
Processors/Traders
Quick overview of a value chain.
Producers
Financial (cross cutting)
Input Suppliers

4. In assessing financial markets…
Macro-Level
The Enabling Environment
e.g., Policy Legislation, Regulation, Supervision
e.g., Credit bureaus, Auditors, Tech service providers
Meso-Level
Financial Infrastructure
Micro-Level
Retail Providers
e.g., Banks, MFIs, Insurers
Clients
In assessing financial markets…
The greatest distinction between value chain and financial sector approach occurs at the core levels:
Clients
Retail Providers

5. Non-Bank Financial Inst.
WE OFTEN THINK ABOUT FINANCING VALUE CHAINS VIA FINANCIAL INSTITUTIONS
BANKS
Global Retailers
BANKS
National Retailers
Exporters
Wholesalers
BANKS
CREDIT UNIONS
Non-Bank Financial Inst.
Processors/Traders
BANKS
CREDIT UNIONS
NBFIs
MicroFinance NGOs
Producers
Input Suppliers

6. In Assessing Markets with VCA
Demand: Focuses on most relevant financial services demanded because they help targeted enterprises to take advantage of opportunities for growth
Supply: Identifies range of service providers, building on their records, perspectives and relationships
Put simply – a value chain lens focuses more narrowly on types of financial services than a financial sector lens,
but more broadly on financial service providers – fertilizer suppliers, traders, warehouses, processors, as well as financial institutions.

7. VALUE CHAIN FRAMEWORK AND FINANCE
Global Retailers
Financial Services
Overdrafts/ lines of credit
Investments, loans or savings to fund upgrading
Working capital to purchase inputs or products
Seasonal production loans
National Retailers
Exporters
Wholesalers
Processors/Traders
. It was an interest in these themes of financial services and the value chain that prompted some research into the dynamics and lessons we could learn from financial services provided by businesses. The result was the AMAP paper, “ Value Chains and their Significance for Addressing the Rural Finance Challenge.”
The Value Chain framework recognizes the importance of …
Financial services – critical to facilitate both product flow and upgrading
Range of services demanded up the chain
Not all of these delivered exclusively by financial institutions… see red.
Producers
Input Suppliers

8. Financial Service Providers
BARRIERS TO ENTERING THE RURAL MARKET
Costs and Risks
Dispersed market
Cost of infrastructure, communication and information
Seasonality
Shared production and price risks
Historic Subsidies
Limited collateral x
Financial Service Providers
Financial services – critical to facilitate both product flow and upgrading
Financial institutions are reticent about lending to agriculture and rural customers, due to the costs and risks that many have written about
This has led to actors in rural and ag value chains providing financial services to each other, through vertical linkages.
The paper takes a look at three of these financial services.
Producers

9. VALUE CHAIN FINANCE - THREE EXAMPLES
Contract Farming/ Outgrower Schemes
Loans linked to purchase agreements
High value
Trader Credit
Loan between
buyer and seller
Grains and high value
Warehouse
Receipts
Loans backed by receipts issued by safe, secure warehouse
Existing literature with available research describing how they worked, and constraints they faced. They also have a significant role for non-financial institutions. We researched leasing as well, but kept encountering services provided by finance companies.
Trader credit, or loans between buyers and sellers of inputs or products. Products can be both basic grains or high-value crops.
Contract Farming and Outgrower schemes tend to operate around higher value crops. In both of these arrangements, loans are tied to purchase agreements. In outgrower schemes, buyers offer other services, like extension or TA.
In warehouse receipts systems, loans are backed by receipts issued by warehouses that offer safe and secure storage facilities for non-perishable commodities.

10. VALUE CHAIN FINANCE - TRADER CREDIT
Benefits
Inputs and product sales
Higher yields
Bulk input purchases
Tap future production for collateral
Global Retailers
National Retailers
Exporters
Wholesalers
Learning
Business information used to screen customers
Processors/Traders
You can see a modified value chain here. The red lines mark the path of a product, from input to final markets. Green lines added to show flow of loans. These can move in both directions, with exporters or processors advancing cash to producers, or input suppliers advancing inputs to them. We even note producers providing loans to processors and traders. Trader credit, and the relationships that facilitate these transactions, provide both product related benefits
[More sales, higher yields through the use of better inputs], and rural finance-related benefits.
Red lines show the product transactions between players… green lines the financial transactions.
Commodity like rice.
Shepherd’s FAO study of rural finance in Asia found that 80% of rice millers provided credit to producers.
Producers may also have inputs sold on credit.
Rice producers themselves provide financing to processors and traders.
Lessons for Financial Sector
Loan terms and structure reflect economic activity
Financial Sector can increase trader credit through loans to larger VC actors
Producers
Input Suppliers

11. VALUE CHAIN FINANCE - OUTGROWER SCHEMES
Benefits
More secure product and market
Higher yields and quality
Bulk input purchases & product sales
Contracts for collateral, loan and sales terms, and product specs
Global Retailers
National Retailers
Exporters
Wholesalers
Learning
Business relations screen, train and monitor customers
Processors/Traders .
The second VC financial service we looked at was outgrower schemes. In outgrower schemes, contracts exist between lender and borrower. The contracts spell out a mix of services and responsibilities: loans, input packages, production specifications, technical services or monitoring, and market agreements.
Differences between the lending flows for outgrower schemes and the ones you saw with trader credit include direct links between the larger players and producers. Input suppliers move inputs through larger players.
This difference points to a significant benefit of outgrower schemes:
More secure product for buyers like exporters and processors; more secure access to higher value markets for producers.
With warehouse receipts, the focus is on the lower end of the value chain. Producers and traders store products in secure warehouses. The warehouses issue receipts, which can be used to as collateral for loans from banks.
For those of you more familiar with the VC framework, VCA looks at relationships between players, and not just their role in transactions. These relationships are described in terms of Benefits, learning, and relative power between the actors.
Benefits to producers are significant, even without the loan. – More money, lower cost, more efficient marketing system.
Allows producers to use existing product as collateral, rather than riskier future product
Lower risk and greater legal formality attracts the banks
Lessons for Financial Sector
Loan terms and structure reflect economic activity
Financial Sector can increase trader credit through loans to larger VC actors
Producers
Input Suppliers

12. Producers VALUE CHAIN FINANCE - WAREHOUSE RECEIPTS Benefits Learning
Processors/Traders
Receipt
Warehouse
Bank
Producers
Benefits
Extended sales season, higher prices, lower losses
Bulk sales, sight-unseen transactions
Collateral based on secure product, legal receipts
Learning
Grading standards
Receipts provide screening and security to banks
Producers

13. Frequent, creating high default risk
VALUE CHAIN FINANCE LIMITS & POWER RELATIONSHIPS
Power / Learning / Benefit
LIMITS
Trader
Credit
Contract
Farming
Warehouse Receipts
Monopoly/ Unfair Pricing
Checked by market info and trader competition
Checked by need for reliable product
Without warehouse standards and inspection 
Side-Selling
Frequent, creating high default risk
Less options due to closer monitoring
No. Product already deposited
Enabling Environment
Trust
Enforceable contracts
Significant legislative/ regulatory changes
These products have some limitations as well.
Because they tend to be built on personal and business relationships, outreach potential is limited. This is less an issue in the warehouse receipts system, but costs of these systems can create some barriers for direct participation by small farmers.
How lenders charge for loans is often not transparent. This can lead to unfair pricing if they are the only lender in town, and market information is not readily available.
Borrowers can also take advantage of lenders, selling crops to competing buyers instead of the traders they borrowed from.
Warehouse receipts require a number of laws and regulations.
Let me mention three quick cases involving these challenges.
Ghana cotton – Monopsony undermined not only the trader credit system
Small group of cotton seed buyers. Fixed price of seed extremely low, in an attempt to maximize their profits and maintain relationships with producers through continued indebtedness. Both attempts failed. The producers started using the advances to buy inputs for more profitable products, which they produced instead of cotton. This left the seed buyers without security on their loans (which the producers did not repay) and product.
Competition and market information can serve as checks to distortions caused by monopsonies.
Competition. In Zimbabwe, CARE designed a program to increase the number of traders in more remote communities. Training plus a temporary credit guarantee to reduce barriers to entry. Gained working relationships with distributors. Over seven years, 580 traders received this assistance were absorbed into the private input distribution network.
Market information. Kenya. How transparent is the pricing? Kenya Tea Development Agency sells fertilizer on credit, and recovers its loan through the price it pays for the tea it buys from producers. Finance charges are incorporated into both fertilizer and tea prices.
Price of fertilizer = procurement price + transport cost + interest on large commercial loan by KTDA
Price of tea = published auction price – principal and interest charges – profit
400,000 producers receive credit through this structure.
Exploitative pricing – Cotton in Ghana
Market information – Tea in Kenya
Trader competition – Traders in Zimbabwe

14. Rural Finance Through….
VALUE CHAIN ACTORS & FINANCIAL INSTITUTIONS THEIR RELEVANCE AND COMPLEMENTARY ROLES
Rural Finance Through….
Value Chain Actors Financial Institutions
Vertical transactions
Make money on VC products
Presence and depth of outreach
Terms, conditions and risk/cost management fit economic activity
Working capital to smaller players
Embedded financial services – lower marginal costs, production and marketing benefits
Horizontal transactions
Financial products
Outreach Potential
Sound financial practices and technology
Working capital to larger players, investment capital
Efficiency of unbundled services
It is not a question of which set of actors is the key to expanding rural finance. Both have crucial advantages, limits, and roles and perspectives that can complement each other.
This reflects where they make their money, where they are today, and what their potential is. (Depth of outreach/ breadth of outreach potential, as well as depth if they align with VC players (Grain warehouse highlights such an example)
This difference in where they make their money also highlight their strengths in financial transactions – the fit with the economic transaction (because it is an extension of it, and there to make sure it happens) vs the sound practices and technology that comes with specializing in financial services.
The financial products they are more ready to offer – Working capital to smaller players vs. inv cap, working capital to larger players, and savings.
And their competitive advantages – embedded vs. Efficient unbundled

15. IN CONCLUSION: TO EXPAND RURAL FINANCE AND ENTERPRISE GROWTH…
Think outside between the boxes
Investment Loans
Upgrading
Investment Loans
Upgrading
Financial Market Assessment
Value Chain Analysis
Financial Market Assessment
Value Chain Analysis
Financial Intermediation
Embedded Services
Financial Intermediation
Embedded Services
Financial Institutions
Buyers and Processors
Financial Institutions
Competitiveness
Cost recovery & risk management
Buyers and Processors
Banks and Producers
Banks and Processors
Competitiveness
Cost recovery & risk management
Banks and Producers
Banks and Processors
Financial Sustainability
Economic Growth
Macro-Level
The Enabling Environment
e.g., Policy Legislation, Regulation, Supervision
e.g., Credit bureaus, Auditors, Tech service providers
Meso-Level
Financial Infrastructure
Micro-Level
Retail Providers
e.g., Banks, MFIs, Insurers
Clients
Financial Sustainability
Economic Growth x

16. VALUE CHAIN FINANCE
THANK YOU