value chain finance beyond microfinance for rural entrepreneurs value chain finance workshop addis...
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Value Chain FinanceBeyond microfinance for rural entrepreneurs
Value Chain Finance WorkshopAddis Ababa24 June 2010
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Amsterdam, The Netherlands www.kit.nl
The issue at stakeRural SMEs in developing countries: entrepreneurial, resilient, but not bankable…?
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Amsterdam, The Netherlands www.kit.nl
Problems in financing rural SMEs• Lenders: few assets, informal management
•High transaction costs in countryside
• Lack of market information
•High risks in agriculture
•Distortion government and donor programs
• Poor repayment culture
“Too large for microfinance, too small for banks”
“The missing middle in finance”
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CHAIN ACTORS
CHAIN SUPPORTERS
CHAIN CONTEXT
The value chain
Source: SNV LA
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Financing the value chain
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Chain liquidity
MFI Agriculturalfinance
Bank
Value chainfinance
Bank
Financing the value chain
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Value Chain Finance TriangleReducing costs:
Due diligence
Monitoring
Enforcement
Cash management
Administration
Reducing risks:
Production
Price
Market
Default
Currency
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Three situations of value chain finance
1. Crafting new value chains
2. Expanding chain liquidity
3. Unleashing investments
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1. Crafting new chainsMarket and produce available, yet no chain. Finance linked to capacity building to develop the chain
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2. Expanding chain liquidityFinancial agents link with chain actors providing working capital to finance product flow – enabling the scaling up of business
1. Lead firm strategyUse a solid lead firm as a way to reach non-bankable suppliers e.g. contract farming (“classic” Value Chain Finance)
2. Capacity building strategyBuild capacities of suppliers and build their credit history so they become bankable
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3. Unleashing investments
Financial agents link with chain actors to provide investment capital enabling the upgrading of business
• Medium-term syndicate loans
• Micro leasing
• Temporary equity
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Soybean Ethiopia
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Remodeling risk managementBringing the business into the picture: Solidity of business rather than standard
financial ratios Future rather than the past Cash flows rather than balance sheet
The value chain as soft collateral: Sales contracts Technical assistance Group formation Product claim Savings and insurance Information flows
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The chain of value chain finance Risk sharing Finance for the entire chain Reaching out to producers
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Involving local banks
Key role due to proximity:
Develop sector knowledge to show the opportunity
Set-up pilots to build track record
Formalize the chain actors and develop collateral
Schemes for co-financing and risk-sharing
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Key issues in Value Chain Finance
Risk sharing is key: need for cross-organizational collaboration and innovation
Added value of VCF is in reorganizing and upgrading the chain
VCF reaches beyond micro-finance
Paradox of chain integration versus creation of monopolies and exclusion
Finance versus other critical chain issues: market, knowledge, skills, collaboration, trust, policies etc.
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The Value Chain Finance Book
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Produced through a “Writeshop”
The “writeshop” approach is specifically designed to assist people to get the information out of their heads and onto paper
Practioners, farmers, traders, extensionists, NGO people, civil servants etc. are not necessarily good writers however they have an interesting story to tell
A writeshop is an intensive, participatory workshop where people jointly produce a practical book in easy-to-understand language
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The Value Chain Finance bookProvides practical knowledge for organizations working on market development, value chains, financial services
Structure of the book:
Background Framework Cases Synthesis Resources
www.kit.nl
Cases crafting new chains:
Milk India Potato Peru Milk Bolivia Chilli Kenya
Cases chain liquidity:
Cotton Tanzania Sal leaf India Tea Kenya Rice Rwanda
Cases unleashing investments:
Honey Kenya Coffee Nicaragua Fish India Soybean Ethiopia Quinoa Bolivia
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A special word of gratitudeAuthors, resource people, editors, support staffand all donors-partners:
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Amsterdam, The Netherlands www.kit.nl
Thank you very much for your attention