THE VALUE CHAIN FRAMEWORK RURAL FINANCE AND LESSONS

THE VALUE CHAIN FRAMEWORK, RURAL FINANCE, AND LESSONS FOR TA PROVIDERS AND DONORS Bob Fries – ACDI/VOCA 3/15/07

Key Messages 1. The Value Chain Framework is useful for expanding financial services, not just for enterprise development. 2. A value chain perspective helps donors and TA providers to focus on financial services that offer significant economic opportunity. 3. Financial institutions can learn from and engage more with value chain actors in order to develop new products and reach new markets.

First some useful definitions Value Chain = the set of actors (private, public, and including service providers) and activities needed to bring a product from production to the final consumer. Value Chain Analysis an assessment of the actors, and factors influencing the performance of an industry, and relationships among participants to identify the driving constraints to increased efficiency, productivity and competitiveness of an industry and how these constraints can be overcome. Value Chain Finance = financial services and products flowing to or through value chain participants to address and alleviate driving constraints to growth.

VALUE CHAIN FRAMEWORK AND FINANCE Financial Services Global Retailers • Overdrafts/ lines of credit • Investments, loans or savings to fund upgrading National Retailers Exporters Processors/Traders • Working capital to purchase inputs or products • Seasonal production loans Producers Input Suppliers

Product and Financial Flows within the Value Chain Financial Institution Suppliers Value Chain Suppliers Product flow Finance flow Commercial Banks Non-Bank Financial Institutions Exporters/ Wholesalers Processors Local Traders & Processors Grass-Roots MFIs, NGOs, Coops areiers s l risesupp s!! p r te D ce l ens AN servi a r ru er al ny mand anci a M de f fin o Producer Groups Farmers Input Suppliers

VALUE CHAIN FINANCE - THREE EXAMPLES Trader Credit Contract Farming/ Outgrower Schemes Warehouse Receipts • Loan between buyer and seller • Loans linked to purchase agreements • Grains and high value • Loans backed by receipts issued by safe, secure warehouse • High value

VALUE CHAIN FINANCE - OUTGROWER SCHEMES Benefits Global Retailers § More secure product and market § Higher yields and quality National Retailers Exporters Wholesalers § Bulk input purchases & product sales § Contracts for collateral, loan and sales terms, and product specs Learning Processors/Traders Producers Input Suppliers § Business relations screen, train and monitor customers Lessons for Financial Sector • Loan terms and structure reflect economic activity • Financial Sector can increase trader credit through loans to larger VC actors

VALUE CHAIN FINANCE LIMITS & POWER RELATIONSHIPS LIMITS Trader Credit Contract Farming Warehouse Receipts Monopoly/ Unfair Pricing Checked by market info and trader competition Checked by need for Without warehouse reliable product standards and inspection Side-Selling Frequent, creating high default risk Less options due to No. Product already closer monitoring deposited Enabling Environment Trust Enforceable contracts § Exploitative pricing – Cotton in Ghana § Market information – Tea in Kenya § Trader competition – Traders in Zimbabwe Significant legislative/ regulatory changes

VALUE CHAIN ACTORS & FINANCIAL INSTITUTIONS COMPLEMENTARY ROLES Rural Finance Through…. Value Chain Actors • • 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 Financial Institutions • • Horizontal transactions Financial products Outreach Potential Sound financial practices and technology • Working capital to larger players, investment capital • Efficiency of unbundled services

IN CONCLUSION: To expand rural finance and enterprise growth …. . Think outside between the boxes Investment Loans Financial Market Assessment Financial Intermediation Financial Institutions Costand recovery & risk management Banks Producers Financial Sustainability Upgrading Value Chain Analysis Embedded Services Buyers and Processors Competitiveness Banks and Processors Economic Growth Clients x

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