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THE VALUE CHAIN FRAMEWORKAND RURAL FINANCING

July 29-30, 2010ApoView Hotel

Davao City

EMITERIO F. SANSON, JR.Senior Banking & MF Specialist

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KEY MESSAGES

The Value Chain Framework is useful for

EXPANDING FINANCIAL services and for

DEVELOPING ENTERPRISES

Value Chain Financing is NOT NEW. It helps to

fuel many enterprises

FINANCIAL INSTITUTIONS can learn from and

engage more with value chain actors in order

to develop new products and reach new

markets

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What is VALUE CHAIN?Global Retailers

Exporters

National

Retailers

Wholesalers

Processors/Traders

Input Suppliers

BANKS

Banks,MFI,NGOs,COOPs

Banks, Non-Bank Fincos

Producers

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VALUE CHAIN CONCEPT

End Users/Consumers

Marketing

Production

Inputs

HumanResources

Services

Infrastructure

Capital

Equipment

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In assessing financial markets

Clients

The Enabling Environment Meso-Level

Financial Infrastructure

Micro-Level Retail Providers

E.g., Banks, MFIs, Insurers

e.g., Credit bureaus, Auditors, Tech Service Providers

e.g., Policy Legislation, Regulation, Supervision

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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

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VALUE CHAIN FINANCING - EXAMPLES

TRADE CREDIT

Loan between buyer and seller (grains & high value crops)

Benefits (inputs and product sales, higher yields, bulk purchases,

future production as collateral)

OUTGROWER SCHEME (CONTRACT FARMING/GROWING)

Loan linked to purchase agreement (more secure product and

market)

Benefits (Higher yields and quality, bulk purchases input/products,contracts for collateral, loan, sales terms, and product specs)

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Value Chain Actors & Financial Institutions:

Their Relevance and Complementary Roles

VALUE CHAIN ACTORS FINANCIAL INSTITUTIONS

Vertical transactions Horizontal transactions

Make money on VC product Financial products

Presence & depth of outreach Outreach Potential

Terms, conditions & risk/cost Sound financial practices

management fit econ activity

Working capital to small players Working capital to larger

players

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FINANCIAL PATTERNS & POTENTIAL

DEMAND FOR FINANCE

VALUE CHAINLEVEL

WITHIN CHAINFINANCE

FINANCE FROMFINCOS

POTENTIALDEMAND

RETAIL Receive Suppliercredit

Bank loan, coops,5-6

microloans

WHOLESALE/EXPORT

Offer suppliercredit toretailers;Offercontracts toProcessors

Bank loans; creditline facility

Commercialloans/credit line

PROCESSING Contracts and

Advances forwholesalers; offersupplier financeand technicalservices

Bank loans Med/LT

investment forexpansion

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Value ChainLevel

Within ChainFinance

Finance Needed PotentialDemand

PRODUCTION Supplier Financefrom Processor &

Input Distributor

Short term loan;working capital

loan; Microfinance

Loan/Credit Line

INPUTDISTRIBUTION

Receive SupplierFinance & VolumeDiscounts fromSuppliers

Working capitalloan

Short term loan

INPUT SUPPLY Offer supplierfinance to inputDistributors andLarge Producers

Short term bankloans; creditfacility

none

FINANCIAL PATTERNS & POTENTIAL

DEMAND FOR FINANCE (Cont)

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What Therefore are the Opportunities for

Microfinance?

Where are the opportunities for microfinance institutions for

financing within the value chain?

* Input Distribution ( financing the fertilizer/chemical

requirements of farmers)

* Production level (financing labor and other materials needed in

production)

* Processing (packaging materials, financing small tools and

equipments, etc)* Trader/Wholesaler/Assembler/Consolidator (financing working

capital)

* Retail (financing micro business loan)

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BANANA CHIPS CARDABA SUBSECTOR MAP

Local Retail Outlets Importers

Banana Chips Exporters( about 15% of cardaba production)

MANILAEXPORTERS

Micro ProcessorsLess than 5% of

Cardaba production

TRADERS/DISTRIBUTORS

First Fry ProcessorsProcessing their own

production

AssemblerBarangayAgent

CARDABA GROWERS/ TRADERS

Pricemakers

Unripe banana

Good quality for processing

Price makers butshifts to pricetakers when supplyis very limited; lowrisk; med proximityto markets

Price takers; highrisk; mediumproximity tomarkets; fewsuppliers

Source of info;quality control atcommunity level;

has low degree ofinfluence at the

community chain

PriceMakers,med risk

PriceMakers,

med risk;

with someoptions onchannels

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BANANA CARDABA: LOCAL MARKET

Supermarkets End ConsumersBanana Cue Vendors/ Food Est.

Supermarkets

Wholesalers in Manila PublicMarket

Manila Public MarketsRetailers

ManilaDistributors

Manila Based Traders

Davao PublicMarket Retailers

Davao basedDistributors

BarangayTraders

Assembler

CARDABA GROWERS/ TRADERS

JumboSizes Only

Price takers; lowrisk; low

proximity tofarmers

PriceMakers,low risk

Pricetakers,low risk

Source of info; quality controlat community level; hasstrong degree of influence at

the community chain

Price takers;

high risk;medium

proximity tomarkets

Price makers;med risk; withseveral market

channel options

Fresh Cardaba, ManilaRoute

Fresh Cardaba, Davao Route