the value chain framework and rural finance
TRANSCRIPT
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THE VALUE CHAIN FRAMEWORK AND
RURAL FINANCE
SEEP Annual Meeting
Bob Fries
ACDI/VOCA October 2005
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KEY MESSAGES
1. The Value Chain Framework is useful forexpanding
financial services and fordeveloping enterprises.
2. Value Chain Finance is not new. It helps to fuelmany enterprises. Can you believe its happened
without us?
3. Financial institutions can learn from and engagemore with value chain actors in order to develop new
products and reach new markets.
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Financial (cross
cutting)
Sector-specific
providers
Cross-cutting
providers
ProducersProducers
National
Retailers
Processors/Traders
Global
Retailers
Input Suppliers
WHAT IS A VALUE CHAIN?
WholesalersExporters
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In assessing financial markets
Clients
The greatest distinction
between value chain and
financial sector approachoccurs at the core levels:
-Clients
-Retail Providers
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ProducersProducers
National
Retailers
Global
Retailers
Input Suppliers
BANKS
WE OFTEN THINK ABOUT FINANCING VALUE CHAINS
VIA FINANCIAL INSTITUTIONS
BANKS
BANKS
CREDIT UNIONS
Non-Bank Financial Inst.
BANKS
CREDIT UNIONS
NBFIs
MicroFinance NGOs
WholesalersExporters
Processors/Traders
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ProducersProducers
Exporters
National
Retailers
Processors/Traders
Global
Retailers
Input Suppliers
Overdrafts/ lines of
credit
Investments, loans or
savings to fund
upgrading
Working capital topurchase inputs or
products
Seasonal production
loans
VALUE CHAIN FRAMEWORK AND FINANCE
Financial Services
Wholesalers
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Financial
Service
Providers
BARRIERS TO ENTERING THE RURAL MARKET
Producers
x
Costs and Risks
Dispersed market
Cost of infrastructure,
communication and
information
Seasonality
Shared production and
price risks
Historic Subsidies
Limited collateral
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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
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ProducersProducers
National
Retailers
Processors/Traders
Global
Retailers
VALUE CHAIN FINANCE - TRADER CREDIT
Benefits
Inputs and product sales
Higher yields
Bulk input purchases
Tap future production for collateral
Learning
Business information used
to screen customers
Lessons for Financial Sector
Loan terms and structure reflect
economic activity
Financial Sector can increase trader credit
through loans to larger VC actors
WholesalersExporters
Input Suppliers
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VALUE CHAIN FINANCE - OUTGROWER SCHEMES
ProducersProducers
National
Retailers
Global
Retailers
WholesalersExporters
Benefits
More secure product and market
Higher yields and quality
Bulk input purchases & product sales
Contracts forcollateral, loan and salesterms, and product specs
Learning
Business relations screen,
train and monitorcustomers
Input Suppliers
Processors/Traders
Lessons for Financial Sector
Loan terms and structure reflect
economic activity
Financial Sector can increase trader
credit through loans to larger VC actors
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ProducersProducersProducersProducers
VALUE CHAIN FINANCE - WAREHOUSE RECEIPTS
Producers
Processors/Traders
Benefits
Extended sales season, higherprices, lower losses
Bulk sales, sight-unseen
transactions
Collateral based on secure product,
legal receipts
Learning
Grading standards
Receipts provide screening
and security to banks
WarehouseReceipt
Bank
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VALUE CHAIN FINANCE
LIMITS & POWER RELATIONSHIPS
Exploitative pricing Cotton in Ghana
Trader competition Traders in Zimbabwe
Market information Tea in Kenya
Enabling
Environment
Trust Enforceable
contracts
Significant
legislative/regulatory changes
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
Power / Learning / BenefitPower / Learning / Benefit
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VALUE CHAIN ACTORS & FINANCIAL INSTITUTIONS
THEIR RELEVANCE AND COMPLEMENTARY ROLES
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
Rural Finance Through.
Value Chain Actors Financial Institutions
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IN CONCLUSION: TO EXPAND RURAL FINANCE AND
ENTERPRISE GROWTH
Think outside between the boxes
x
Clients
Financial Market Assessment Value Chain Analysis
Financial Institutions Buyers and Processors
Financial Sustainability Economic Growth
Financial Intermediation Embedded Services
Banks and Producers Banks and Processors
Investment Loans Upgrading
Cost recovery & risk management Competitiveness
Financial Market Assessment Value Chain Analysis
Financial Institutions Buyers and Processors
Financial Sustainability Economic Growth
Financial Intermediation Embedded Services
Banks and Producers Banks and Processors
Investment Loans Upgrading
Cost recovery & risk management Competitiveness
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VALUE CHAIN FINANCE
THANK YOU