Value chain finance

Traders, processors, input suppliers and exporters are a major source of financial services to rural, agriculture dependent households. These buyers and suppliers provide credit to farmers as part of input supply and product purchase transactions. This inter-linking of credit with other services helps to reduce the risk associated with agricultural lending, particularly when the credit is tied to subsequent sale of produce. The type of financial products provided by buyers and suppliers is usually limited to seasonal credit and short term advances but, nevertheless, it has been found to be at least as important to farmers as loans from specialist financial intermediaries.

Library Resources

resource title type year resource
International conference on livestock value chain finance and access to credit Conference Proceedings 2018

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Improving the livelihoods of livestock smallholders and other value chain actors through livestock value addition and marketing is constrained by the lack of access to finance, working capital, affordable quality inputs and well-structured value chains. Unlike other agricultural subsectors such as crops, fruits and vegetables, the financing of livestock activities for smallholder, especially fattening andfinishing activities, through financial institutions or value chain actors is very scarce. Livestock smallholders usually cannot provide collateral, such as land title deeds or physcial assets, to obtain loans from financial institution, and vale chain finance in this sector is not well developed. However, there are a few examples from developing countries in Africa, Asia and Central and South America where financial products and mechanisms have been developed to help smallholder livestock producers to access working capital and to add value to their product. 

This conference forms part of one of the outputs/deliverables of the "Innovative beef value chain development schemes in Southern Africa" project. The project is funded by the International Fund for Agricultural Development (IFAD) and implemented by the International Livestock Research Institute (ILRI) in collaboration with the Swaziland Water and Agriculture Development Enterprise (SWADE) with the support of Micro-Finance Unit (MFU) Swaziland. The conference is also part of the research on value chains under the CGIAR Research Program on Policies, Institutions and Markets (PIM). In addition to the mentioned project partners, Nedbank was the financial institution chosen to be part of the project and provide loans to the mini-feedlots farmers.

Author Mtimet, Nadhem Dube, Sikhalazo
Number of Pages 290 pp.
Primary Language English (en)
Region / Country Global
Keywords LIVESTOCK; VALUE SYSTEMS; CREDIT; FINANCE
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Passerelles - Finance rurale : Perspectives de trois continents Journal Article 2016 French (fr)

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Au cours des dernières années, une très forte croissance des marchés agricoles mondiaux a conduit à un regain d’intérêt pour la finance rurale et agricole et à de nombreux développements dans ce domaine.

Quels sont ces développements ? Quelles expériences existent à travers le monde ? Que pouvons-nous apprendre de celles-ci afin de soutenir un financement rural et agricole plus durable ?

Ce numéro de Passerelles tente de nous éclairer sur ces questions.

  • Massimo Pera (FAO) fournit une perspective globale sur le financement rural et agricole et sur la nécessité d'adopter une approche plus centrée sur la chaîne de valeur agricole.
  • Les articles suivants portent sur des expériences spécifiques en matière de finance rurale sur trois continents : Afrique du Nord (Maroc) et Amérique centrale (Nicaragua) par Juana Ramirez (ADA) et Asie du Sud (Bangladesh) par Marina Abboud (ADA).
  • L´importance des relations sociales dans les zones rurales est abordée dans tous les textes, et Luminita Postelnicu et Niels Hermes soulignent plus précisément comment le capital social facilite l'accès au financement et aide ainsi à cultiver l'entreprenariat en milieu rural. 
Lien vers la publication  -  French (fr)

Author ADA
Publisher Ada Microfinance
Luxembourg, Luxembourg
Number of Pages 40
Volume / Issue# 3
Primary Language French (fr)
Region / Country Global, Africa, Americas
Morocco, Bangladesh, Nicaragua
Keywords Financement Rural, Financement Agricole, Chaînes de valeurs agricoles, Capital social
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Insights on Credit Risk and Agriculture Value Chain Finance: Promoting Rural Microfinance through Peer-to-Peer Learning Toolkit 2016 English (en)

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This toolkit provides an introduction into the theory and practice of credit risk management and Agriculture Value Chain Finance, and concrete tools to begin applying them in the practice.

The publication provides an overview of some of the main topics tackled during the Rural Impulse Fund (RIF II) Learning Academy for the Commonwealth of Independent States, a learning event organized by Incofin Investment Management (Incofin IM) in Prague in November 2015. The Learning Academy was organized with the recognition that financial institutions in the CIS region could be enhanced through improved credit risk management practices and the development of tailored credit products to finance agriculture. As such, the RIF II Learning Academy aimed to provide practical tools and strategies for credit risk management and new approaches for funding the agricultural sector through Agriculture Value Chain Finance (AVCF).

Insights on Credit Risk and Agriculture Value Chain Finance: Promoting Rural Microfinance through Peer-to-Peer Learning  -  English (en)

Publisher Incofin
Number of Pages 34 pp.
Primary Language English (en)
Region / Country Global
Keywords Agriculture, Agricultural Value Chain Finance, Value Chain Finance, Risk Management
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Finanzas rurales: Perspectivas de tres continentes Journal Article 2016 Spanish (es)

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Finanzas rurales: Perspectivas de tres continentes

En los últimos años, el importante crecimiento de los mercados agrícolas globales ha dado lugar a un interés renovado en las finanzas agrícolas y rurales, y con ello a diversas innovaciones en el sector.

¿Cuáles son estas innovaciones? ¿Qué tipo de experiencias existen alrededor del mundo? Y ¿qué podemos aprender de ellas para apoyar unas finanzas rurales y agrícolas más sostenibles?

La presente edición de Passerelles pretende contribuir a este debate.

  • Massimo Pera nos ofrece una perspectiva global y señala la necesidad de adoptar un enfoque de cadena de valor en las finanzas rurales.
  • Los artículos siguientes ejemplifican diversas experiencias en finanzas rurales en tres continentes: el Norte de África (Marruecos), América Central (Nicaragua) y el Sur de Asia (Bangladesh).
  • La importancia de las relaciones sociales en áreas rurales es clave, por ello Luminita Postelnicu y Niels Hermes explican cómo el capital social facilita el acceso a las finanzas y promueve el emprendimiento.
Link de la revista  -  Spanish (es)

Author ADA
Number of Pages 40
Primary Language Spanish (es)
Region / Country Global, Africa, Northern Africa, Americas, Central America, Asia, Southern Asia
Nicaragua, Bangladesh, Morocco
Keywords Financiamiento cadenas de valor
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Value Chain Financing: How agro‐enterprises can serve as alternate aggregation points for delivering financial services to smallholder farmers Brief 2015

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This Brief builds on a report titled Catalyzing Smallholder Agricultural Finance, which presents a series of  pathways for financing, including lending to farmers aggregated into producer groups, financing through integrated multinational buyer supply chains, and building direct‐to‐farmer financing models. This briefing elaborates on the concept of “alternate aggregation” to explore value chain financing models that serve non aggregated farmers through the agro-enterprises that interact with those farmers. 

Etude sur les systèmes d’entreposage et de tierce détention adaptés à l’Afrique Sub-Saharienne Report 2015 French (fr)

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Cette étude vise à favoriser l’émergence de gestionnaires d’entrepôt et de tiers détenteurs capables de proposer des services d’entreposage et de tierce détention qui faciliteront l’accès au financement sur récépissé d’entrepôt ou warrantage (ainsi qu’à d’autres formes de financement sur produits de base) des petits exploitants agricoles. Les pays considérés sont le Burkina Faso, le Cameroun, la Côte d’Ivoire, le Ghana, Madagascar, le Mozambique, le Niger, le Sénégal et l’Ouganda. L’analyse  comprend un examen préalable juridique et institutionnel, visant à recenser les obstacles et à formuler des recommandations pouvant être mises en œuvre dans les pays considérés, et éventuellement dans les pays membres de l’Organisation pour l’Harmonisation en Afrique du Droit des Affaires (OHADA). Les auteurs examinent plus particulièrement quatre types de financement : crédit-stockage communautaire, destiné aux petits exploitants agricoles, les entrepôts privés, les entrepôts publics et le prêt garanti sur la production actuelle ou à venir.

Lien vers le téléchargement  -  French (fr)

Author AFD, CTA et IFAD
Publisher CTA
Number of Pages 228
Primary Language French (fr)
Region / Country Global, Africa
Burkina Faso, Cameroon, Côte d'Ivoire, Madagascar, Ghana, Mozambique, Niger, Senegal, Uganda
Keywords Warrantage, Accès Au Financement, Petits exploitants agricoles
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Agricultural Value Chain Financing (AVCF) and Development for Enhanced Export Competitiveness Report 2014 English (en)

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This report is a product of a workshop organized jointly by the African Development Bank (AfDB) and the Association of African Development Finance Institutions (AADFIs) in collaboration with the Association of Development Finance Institutions of Asia and the Pacific (ADFIAP).. The workshop provided a useful forum for exchange of views on the development of Agricultural Value Chain Finance (AVCF), its various models and methods of financing as well as the roles that can be played by government, Development Finance Institutions (DFIs), commercial banks, microfinance institutions and international development partners. This report has drawn on the presentations and proceedings of the workshop as well as on related materials to examine the issues and suggest very pertinent options for African as well as Asian agribusinesses, policymakers, regulators, financial institutions and development partners on how to tackle emerging challenges and opportunities in agricultural markets.

Document  -  English (en)

Author African Development Bank
Publisher African Development Bank (AfDB)
Number of Pages 136 pp.
Primary Language English (en)
Region / Country Global
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Cracking the Nut Africa: Improving Rural Livelihoods and Food Security Paper 2014 English (en)

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The publication outlines some of the key lessons learned during the 2014 conference in Kigali, Rwanda.

Document  -  English (en)

Author AZMJ
Publisher AZMJ
Number of Pages 46 pp.
Primary Language English (en)
Region / Country Global, Africa, Eastern and Central Africa, Northern Africa, Southern Africa, Western Africa
Rwanda
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Metodología para desarrollar una Estrategia de Financiamiento en Cadenas de Valor Paper 2014

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Ante la escasa oferta de alternativas de financiamiento para los productores, es necesario conocer en profundidad tanto el funcionamiento de los mercados financieros y la oferta disponible, como el funcionamiento de las cadenas de valor en las que se insertan los productores que son objeto de las políticas públicas, de forma de entender sus necesidades y posibilidades reales. En ese marco, el presente documento presenta una metodología para el desarrollo de estrategias de financiamiento a grupos asociativos de cadenas de valor (o clusters) del sector agroalimentario y agroindustrial.

Author Unidad para el Cambio Rural
Publisher Unidad para el Cambio Rural
Number of Pages 23
Primary Language Spanish (es)
Region / Country Global, Americas, South America
Argentina
Keywords Financiamiento cadenas de valor, Argentina
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Financement des chaînes de valeur agricoles : outils et leçons Technical Note 2013 French (fr)

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Le manque de financement peut freiner le développement agricole et, ainsi, limiter l'impact crucial qu'il peut avoir sur la pauvreté. D’où l’importance vitale que les petits exploitants soient pleinement intégrés aux chaînes de valeur, car elles leur permettent de répartir les risques et les coûts du financement agricole. En s’appuyant sur l’expérience étendue de la FAO, cette publication propose une présentation complète des modèles, outils et approches utilisés par les entrepreneurs pour essayer d’améliorer l’accès des petits exploitants aux marchés et ressources agricoles.

Lien vers la publication  -  French (fr)

Value Chain Financing in Agriculture: Experiences of the Agricultural Cooperatives in South Korea Case Study 2013

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Agricultural value chain finance (AVCF) has been considered a very important aspect in rural finance.This is commonly observed in different agricultural production, processing, post production and marketing systems of various commodities and other related activities. Because of this, the Asia-Pacific Rural and Agricultural Credit Association (APRACA) through the IFAD-supported FinServAccess project started to document best practice on agricultural value chain finance of its member countries.

Presently South Korea agricultural value chain finance best practices, initiatives, strategies and trends were documented to showcase how financial institutions and other interest groups supported the productivity, profitability and sustainability of agricultural commodities through appropriate and timely financial activities of their clients.

Author Koh Young-Kon
Publisher Published by: Asia-Pacific Rural and Agricultural Credit Association (APRACA)
Bangkok, Thailand
Number of Pages 27 pp.
Primary Language English (en)
Region / Country Global
Korea, South
Keywords Agricultural Value Chain Finance, Value Chain Finance, Cooperative
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Mainstreaming Small Ruminant Value Chain Finance in Nepal and India Stakeholders Case Study 2013

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The integrated report consists of the two Phases of the activity, namely: Phase I – Nepal Small Ruminant Assessment including financial capacities of stakeholders and best practices to be replicated in strengthening the capacity on improving the access by clientele and Phase II – Exposure Study Visit of Nepal stakeholders to India to understand the dynamics of small ruminant value chain system necessary to encourage massive participation and empowerment of key players and stakeholders of Nepal’s small ruminant production, processing and marketing activities.

Furthermore, the report provides description the processes, lessons learned, issues and concerns encountered by individuals and development institutions required for acceptability, utility, applicability and adaptability of small ruminant value chain financing. Also, this will serve as learning material for those individuals willing to finance small ruminant producers, traders and entrepreneurs particularly in rural villages and marginalized areas.

Author Prasun Kumar Das and Marlowe U. Aquino
Publisher Asia-Pacific Rural and Agricultural Credit Association (APRACA)
Bangkok, Thailand
Number of Pages 61 pp.
Primary Language English (en)
Region / Country Global, Asia
Nepal, India
Keywords Value Chain Finance, Access To Finance, value chain
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Value Chain Financing in Agriculture: Case Studies from India Case Study 2013

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Understanding the flow of the products and finance along the value chain is very important to design the products and services to match the requirements of each of the actors involved in the chain. The paper tried here to give an overall idea of agriculture value chains and the flow of products and finance in Chapter 2. The Chapter 3 dealt with the flow of credit to agriculture sector in India and the challenges it is facing. Three case studies of commodity value chain financing in India are documented in Chapter 4 which has three sections (Maize in Section 1, Milk in Section 2 and Section 3 dealt with a minor commodity ‘Mentha’). It was felt that the case studies on value chain finance will not be completed if there is no case discussion on the financial service provider and the value chain finance products and deliver models by Yes Bank Ltd. were discussed in Chapter 5. The case studies were selected based on their discrete character, importance to the small holder farmers and the acceptability by the financial institutions. The final chapter (Chapter 6) dealt with the general conclusion and future direction which could help to develop financing services and products for the value chain actor so as to improve the effectiveness and efficiency of the value chains.

Author Prasun Kumar Das and Marlowe Ubaldo Aquino
Publisher Asia-Pacific Rural and Agricultural Credit Association (APRACA)
Number of Pages 80 pp.
Primary Language English (en)
Region / Country Global, Asia
India
Keywords Agricultural Value Chain Finance, Financing Agriculture
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Thailand Experiences from the Grassroots: Value Chain Finance Best Practices, Initiatives, Strategies and Trends in Agriculture Case Study 2013

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Agricultural value chain finance (AVCF) has been considered a very important aspect in rural finance. This is commonly observed in different agricultural production, processing, post production and marketing systems of various commodities and other agri-related activities. Because of this, the Asia-Pacific Rural and Agricultural Credit Association (APRACA) through the IFAD-supported FinServAccess Project started to document best practices on agricultural value chain finance of its member countries.

Presently, Thailand agricultural value chain finance best practices, initiatives, strategies and trends were documented to showcase how financial institutions and other interest groups supported the productivity, profitability and sustainability of agricultural commodities through appropriate and timely financial activities of their clients.

Author Maleangpoothong, J.; Photha, P. et al.
Publisher Asia-Pacific Rural and Agricultural Credit Association (APRACA)
Bangkok, Thailand
Number of Pages 48 pp.
Primary Language English (en)
Region / Country Global, Asia, Southern Asia
Thailand
Keywords Agricultural Value Chain Finance, Value Chain Finance
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Sources of Funding and Support System for Value Chain Finance: Lessons from Asia Paper 2012

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This paper is based on the premise that the role of funding is paramount to achieve growth in the agricultural sector and thus help in poverty alleviation. The paper analyses the sources of funding and support systems for agricultural value chain finance in Asia and presents a comparative analyses of various approaches for financing.

The author critiques the various approaches of financing agricultural value chains and the role it plays in promoting the value chains to enhance its competitiveness. Based on the analysis of the case studies and best practices, the author has developed a conceptual framework of conditions in which a typical approach works and recommends variety of options that can be used to scale up value chain finance in Africa.

Author Mr. Anup Singh
Number of Pages 52 pp.
Primary Language English (en)
Region / Country Global, Asia, Central Asia, Eastern Asia, South-eastern Asia, Southern Asia, Western Asia
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Value Chain Financing for Agriculture and Rural Microenterprises Report 2012 English (en)

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Although 70% of the poor reside in rural areas in the Philippines, the agriculture sector has been consistently lagging behind in development. One essential element of agricultural/rural development is access of poor farmers and rural households to affordable financial services. Nearly two-thirds of rural folks borrow from usurious informal sources. Microfinance is looking for ways to foray into the rural areas, and although it presents a great potential in closing the funding gaps in rural finance, microfinance institutions (MFIs) find themselves ill-equipped to handle the risks of agriculture. 

In addressing these issues, the Microfinance Council of the Philippines,Inc. (MCPI) and PinoyME Foundation organized the conference, Value-Chain Financing for Agriculture and Rural Microenterprises, attended by over 180 stakeholders of rural enterprises from MFIs, to private financial institutions, to business development service providers, and government financial institutions. The evolution of value-chain financing is becoming an attractive model of spreading the risks in rural finance among different providers. Locating agriculture microfinance within a stream of funding strategies presents excellent opportunities for plugging gaps in rural finance.

The value chain financing paper is the end result of the said conference, wherein different key players were able to identify risks and potential mitigating measures in pursuing this strategy in providing financing to very vulnerable but highly potent rural enterprises of the poor.

Document  -  English (en)

Author Alemberg Ang
Publisher MCPI and PinoyME
Number of Pages 32 pp.
Primary Language English (en)
Region / Country Global
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Agricultural value chain finance strategy and design Technical Note 2012 English (en)

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IFAD technical note on Agricultural value chain finance strategy and design aims to help programme managers to better understand the evolving transformation of agriculture and modern value chains and how this knowledge can be used to promote financial access and delivery processes for all types of farmers and agribusiness firms within value chains and the country as a whole. This is part of a technical note series that includes other topics including Matching Grants.

Document  -  English (en)

Author Calvin Miller
Publisher IFAD
Rome, Italy
Primary Language English (en)
Region / Country Global
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Agricultural Value Chain Finance Strategy and Design Technical Note 2011

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The technical paper written by Calvin Miller is to provide practical suggestions and policy guidelines to managers and project design teams to help in the design and implementation of projects.  It is also useful for field staff, financial service providers (FSPs), government ministry employees, non-government development organizations (NGOs) and development agencies.  

The aim of this technical note is to help those involved in development agencies to understand:

  • The transformation of agriculture and modern value chains how this knowledge can be used to benefit the processes of financial access and delivery;
  • How to develop value chain financial services in a way that they benefit all kinds of farmers and agribusiness firms within value chains and the country as a whole; and
  • The best way to develop a Programme implementation strategy that will strengthen priority value chains through interventions which address capacity needs, financing, policy and support infrastructure.

This document can serve as a guide in the design of appropriate program interventions which apply AVCF approaches in the development of competitive agricultural value chain. An emphasis is given to interventions which promote financial inclusiveness, and the overall development goals of governments, as well as technical and funding agencies.

Author Calvin Miller
Number of Pages 25 pp.
Primary Language English (en)
Region / Country Global
Keywords Agricultural Value Chain Finance, Agricultural Finance, Value Chain Finance
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How to Support Value Chain Finance in a Smart Way? Report 2011

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This policy statement focuses on ‘good practice’ of donors and financiers in the field of value chain finance (VCF). While in a growing number of publications, the lessons learned and best practices of value chain finance for practitioners in developing countries have been described, much less is published about how ‘northern’ actors can best support these interventions. It is this aspect that the Rural Outreach and Innovation Action Group of the European Microfinance Platform aimed to address. Northern actors include donor organizations and NGOs that offer grant aid, as well as financial institutions focusing mainly on debt finance.

This document is the result of a discussion with members of the Action Group during its meeting at 29th November 2010 in Luxemburg.

Author European Microfinance Platform
Publisher The European Microfinance Platform
Number of Pages 20 pp.
Primary Language English (en)
Region / Country Global
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Agricultural Value Chain Finance - Proceedings of the conference Report 2011 English (en)

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The document is a collection of presentations and discussions that took place in the “Agricultural Value Chain Finance” international seminar organized by the Food and Agriculture Organization of the United Nations (FAO), RUTA and the Academia de Centroamérica and held in San José, Costa Rica from February 22 to 24, 2010.

Document  -  English (en)

Author Rodolfo Quirós
Publisher FAO and Academia de Centroamérica
Number of Pages 217 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Unleashing Agricultural Development in Nigeria through Value Chain Financing Paper 2010

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This report looks at the needs for finance in various agricultural value chains in the country and opportunities for how banks can react to these, laying out new and innovative methods to increase lending to the agriculture sector.

The findings presented in this report are based on a study of selected agricultural product value chains in Nigeria, ten in total: cassava, cotton, fisheries, maize, fruits, palm oil, poultry, rice, soybean, and tomato. The report provides a detailed analysis of each value chain, qualified information on financing requirements for each segment of the value chains, and identifies opportunities to finance operations along the chain. It further provides actionable recommendations for improving productivity, income and growth in the key value chains through financing and technical assistance.

Author Hartwich, F., Devlin, J., Kormawa, P. at al.
Publisher UNIDO, CBN, BOI
Number of Pages 96 pp.
Primary Language English (en)
Region / Country Global, Africa, Western Africa
Nigeria
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Value Chain Finance - Beyond microfinance for rural entrepreneurs Book 2010

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In this book the link between chain actors and financial institutions is described as a means to deepen financial services for value chains. Value chain finance aims to address perceived constraints and risks by providing innovative ways of delivering financial services to rural producers and agribusinesses.

Value chain finance as defined in this book needs to build on trust and strong relationships between chain actors and financial service providers. Parties need to know and  understand each other, and this often requires a change of mindset, particularly with the banks but also with the microfinance institutions, producers and companies. All cases in the book underline the need for financial institutions to have a deep understanding of the realities in the chain and of the need for timely and flexible finance. Likewise, the chain actors need to understand the business realities and mentalities of banks and microfinance institutions looking at risk mitigation and cost coverage for their services.

Publisher Royal Tropical Institute (KIT), International Institute of Rural Reconstruction (IIRR)
Number of Pages 274 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Financing Agriculture Value Chains in Central America Technical Note 2010 English (en)

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Agricultural value chain financing (VCF) is an emerging phenomenon in the region but it is not well studied. Historically, small- and medium-sized famers experience problems accessing formal finance. Participation in a well-structured and dynamic supply chain seems to improve chances of obtaining financing, either directly from larger more liquid agents in the same chain or indirectly from external formal lenders based on the type of relationships and degrees of connectedness in the chain (advance sale contracts, technical assistance agreements, length of transaction history, etc.). Four value chains were studied in Nicaragua (diary and plantains) and Honduras (plantains and horticulture, sweet peppers and tomatoes specifically) to discover how and under what terms and conditions financing was being provided and to understand the challenges in expanding the use of this type of financing. The main findings are (i) VCF is occurring in Nicaragua and Honduras, but it is mostly indirect; (ii) the specific instruments used to support VCF are simple—lead firm vouching for and even providing guarantees for smaller actors, relying on donor financed guarantee funds, and buyer/exporter finance; (iii) creditor rights are weak in both countries; (iv) financial institutions that are participating in VCF are not lowering interest rates despite fewer risks faced; (v) the legacy of inappropriate government interventions, namely debt forgiveness programs, and generally weak support services for producers dampens the enthusiasm of formal financial intermediaries to expand agricultural lending; and (vi) high quality technical assistance is serving as an accelerant and facilitating VCF, but it is donor financed and it is important to find ways to sustain this intervention over time.

Financing Agriculture Value Chains in Central America  -  English (en)

Author Jeremy Coon; Anita Campion and Mark Wenner
Publisher Inter-American Development Bank (IDB)
Washington, D.C., U.S.A.
Number of Pages 67 pp.
Volume / Issue# No. IDB-TN-146
Primary Language English (en)
Region / Country Global
Related Resources
Agricultural Value Chain Financing Kenya: assessment of potential opportunities for growth Paper 2009

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INSPIRED International has a quantitative analysis tool for evaluating value chains and recommending financing strategies and financial products. INSPIRED was engaged b to use this tool to analyse Kenya’s dairy value chain in four principal dairy producing geographies of Kabete, Nyeri, Nakuru and Eldoret. The outcome of this research was a strong interest on the part of several of Kenya’s financial institutions to finance opportunities identified using this numbers based approach. Both KARF and Financial Sector Deepening Kenya (FSD) felt encouraged to extend this analysis to other commodities based on the strong interest shown by the financiers in this approach.

Author Pelrine, R. J., Besigye, A. Ssebbaale, E. and Awori, N.
Publisher Value Chain Finance Centre Kenya, FSD Kenya, USAID
Number of Pages 92 pp.
Primary Language English (en)
Region / Country Global, Africa, Eastern and Central Africa
Kenya
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The Importance of Trade Credit and its Mysterious Absence from Microfinance: Recommendations for the Microfinance Community Paper 2006

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The authors contend that despite the fact that its role is rarely officially recognised by traditional microfinance institutions (MFIs) or their multinational supporters, trade credit has a significant presence among financing options for low-income consumers and microentrepreneurs. Fafchamps’ definition is quoted in this paper, where “trade credit is a form of short term financing that is linked to the purchase of goods”. The authors state that trade credit (being most commonly in the form of supplier credit and consumer credit) exists primarily to promote profits. It fills a financing gap for individuals to purchase consumer goods or for micro-entrepreneurs to purchase supplies.

The authors also state that they can summarise sufficient evidence from specific countries and regions to demonstrate the ubiquitous role of trade credit (although not enough to distinguish the magnitudes of the various types), despite the appearance of very little widespread notice of and no comprehensive studies on the strength of trade credit in microfinance.

The paper sets out to summarise the information about the scope and characteristics of the major types of trade credit and begins to draw some preliminary conclusions about the impact of trade credit on the poor using. The paper concludes with four recommendations targeted at the microfinance community, including MFIs, international donors, NGOs, and companies that serve poor clients:

  1. pay more attention to trade credit, especially as it pertains to existing clients;
  2. encourage pro-poor trade credit and credit bureau development;
  3. protect clients from predatory trade credit through relationship brokering and education; and
  4. seek opportunities to learn from and partner with trade credit providers, offering microloans to replace buyer credit where appropriate.
Author Jessica Droste Yagan and Heather Franzese
Publisher Harvard University
Number of Pages 22 pp.
Primary Language English (en)
Region / Country Global
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Growing Export-Oriented Crops in Kenya: An Evaluation of DrumNet Services Paper 2006

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This paper evaluates a program in Kenya that encourages the production of export oriented crops by providing smallholder farmers with credit linked to agricultural extension and marketing services. While over 90 percent of smallholder farmers in all but the arid regions of Kenya produce horticultural products, fewer than 2 percent do so directly for export. The few Kenyan smallholders who have succeeded in producing for the export market have faced a new set of challenges since January 2005 under the EUREPGAP requirements. These requirements are driven by increasing consumer demand for quality and food safety in the UK and continental Europe, and by an increased emphasis on the need for traceability of horticultural production.

Apart from this the lack of information flows among producers, financial institutions, and marketers of agricultural produce is a major problem in Kenya. The lack of means of transportation among smallholders and poor road infrastructure are also factors that prevent markets from functioning properly. DrumNet, a Pride Africa project, tries to overcome the lack of information flows by directly linking commercial banks, smallholder farmers, and retail providers of farm inputs through a cashless microcredit program that encourages the production of export-oriented crops. Its model tries to overcome the constraints to technology adoption that farmers typically face.

To assess the effectiveness of the project, the researchers use an experimental design in which farmer self-help groups are randomly assigned to either a control group, a group receiving all DrumNet services, or a group receiving all services except credit. We find among the services offered by DrumNet, credit is the most important. Since the production of export crops requires a significant investment in capital and inputs, without credit farmers are less likely to plant the suggested crops.

Initially, DrumNet focused on passion fruit, a profitable but challenging crop sold both in export and local markets. The favourable climate and small farms in Kirinyaga favours this fruit crop, and DrumNet farmers have seen strong results. Beginning in 2004, the DrumNet team began to also support the production of two other crops in high demand with Kenyan exporters, French beans and baby corn. These crops have additional advantages over passion fruit — they are less capital intensive, simpler to grow, and have shorter growing periods leading to faster economic returns.

The results of the evaluation show that DrumNet is an effective model for encouraging the production of export-oriented crops. More and more farmers are planting these crops, invest more in inputs and as a result are seeing higher net margins and higher gross prices for their produce. In addition, clients seem satisfied with the institution. A key to profit and long-term sustainability of DrumNet is the volume of farmers, volume of farm produce, and a successful portfolio of credit products. The main challenge in the implementation and expansion is the need to establish a close relationship with farmers through transaction agents while minimizing costs.

Click here to watch a video about DrumNet.

Author Ashraf, N.; Giné, X.; Karlan, D.
Number of Pages 36 pp.
Primary Language English (en)
Region / Country Global
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The Value Chain Framework and Rural Finance Document 2005

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This resource appears in: Value chain finance

This set of 16 slides provides a useful discussion of value chains in the context of rural finance and based around the following three 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.

The presentation notes that we often think about financing value chains via financial institutions and depicts the different sections along the chain where this may be possible. However, it suggests that when assessing markets with Value Chain Analysis, the demand side focuses on the most relevant financial services demanded because they help targeted enterprises to take advantage of opportunities for growth, whilst the supply side identifies a range of service providers, building on their records, perspectives and relationships.

In particular, the presentation looks at three examples of value chain finance in some detail – trader credit, contract farming/outgrower schemes and warehouse receipts. In each case, it covers the benefits, what information is learned and lessons for the financial sector. Furthermore, consideration is given to the limits and power relationships of each form of value chain finance. The closing section of the presentation includes a look at both value chain actors and financial institutions from the perspective of their relevance and their complimentary roles.

Author Fries, B (ACDI/VOCA)
Primary Language English (en)
Region / Country Global
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Production Credit from Input Suppliers, Processors, and Buyers 2004

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This resource appears in: Value chain finance

The majority of farmer credit needs are provided by input suppliers, product buyers and processor, which fall outside of the formal financial sector and, therefore, government and donor regulation and support. These financial transactions are often vital to farmers for accessing inputs and bridging periods of low income prior to harvests. The arrangements are usually made on the basis that by first securing access to the farmers' produce, processors or buyers will then provide inputs on credit (usually in kind), and also guarantee a market of sale for the farmers' produce. Technical advice is often offered as well to ensure that the necessary quality standards are met in production. Once the farmer hands over his or her produce, the credit and interest is repaid.

However, in the absence of formal financial system regulation, farmers are very vulnerable, as they often have limited market access and information, weak bargaining power, and often powerless business relations with credit providers. This Agriculture Investment Note from the World Bank highlights the largely unexploited potential of supporting these arrangements by improving the:

  • development of producer associations that enable small and marginal farmers to engage better with agribusinesses;
  • brokering contractual linkages between farmers and private businesses;and
  • developing linkages with specialized financial institutions to improve the efficiency and transparency of credit.

It also demonstrates how successful producer credit schemes can be possible, even where traditional contract enforcement systems are weak, and provide win-win outcomes for both farmers and private credit providers. Case study examples are drawn from the Cotton Company in Zimbabwe, FAIDA in Tanzania and Critecnia in Peru.

The Note reminds governments and donors that while they clearly have a role to play in this form of credit, there is need for caution, for example to avoid introducing market distortions and disrupting existing informal financial services.

Author Goodland, A.; Pearce, D. (CGAP).
Publisher World Bank Group
Number of Pages 5 pp.
Primary Language English (en)
Region / Country Global
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Zimbabwe: Agent Program Case Study 2004

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This resource appears in: Value chain finance

The Zimbabwe AGENT programme was initiated in 1995 with the objective of increasing the access of small scale farmers to inputs by establishing a network of rural traders selling agricultural inputs. Typically the agents were village retailers nominated by the communities themselves. An NGO provided training to the agents on input handling, marketing finance and book-keeping and acted as an intermediary for channelling orders to wholesale suppliers and negotiating prices and terms. By consolidating the orders from all the agents, the NGO arranges bulk purchases and delivery and underwrites 75% of the 30-60 day credit supplied by the wholesalers to the retail agents.

After two years of good performance in terms of stock and credit management, the agents graduate and deal directly with the suppliers with no further involvement from the NGO. By late 2001, 580 agents had been trained and were operating independently. Small scale farmers using these agents now have access to an increased variety of cheaper inputs, including tools, irrigation and processing equipment. Agents are also able to give advice on the appropriate selection and use of inputs.

This programme has demonstrated a successful strategy for facilitating the growth of small scale businesses to meet the needs of farmers for agricultural inputs. It is a potential win-win situation with both farmers and retailers experiencing a growth in income as long as prices can be negotiated and set without government intervention. The NGO involvement is strictly limited and time bound, helping to ensure the growth of viable private sector activities. There is no information in the note as to whether the retail agents sell any goods on credit to their farmer customers.

Author World Bank
Publisher The World Bank
Primary Language English (en)
Region / Country Global, Africa, Southern Africa
Zimbabwe
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Buyer and Supplier Credit to farmers: Do Donors have a Role to Play? Paper 2003

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This resource appears in: Value chain finance

This paper has been written primarily to provide advice to donor organisations about whether they should consider channelling funds to private traders for on-lending to farmers as a means of improving financial services in rural areas. Donor funding to market actors and to intermediaries does risk distorting competition and incentives. The author concludes that patient and longer-term support to improving the operating environment for financial service provision in areas dependent on agriculture, can avoid such distortion and have more systematic and far-reaching impacts. A more positive enabling environment would enable the extension of financial services to poorer and more marginal farmers through both product-market and financial market providers.

Another important conclusion within the paper is the scope for encouraging the development of market-oriented associations of small farmers. By forming associations or cooperatives, small farmers can improve their market position. If, together, they improve the scale and quality of their production, they may be able to access better market channels and associated credit arrangements, and they can also present a more attractive credit risk. Donors could help farmers to organise themselves and they could also broker links between farmers and suppliers or buyers. They might consider temporary financial guarantees or provide extension and technical support services.

Financial service providers generally offer more transparent credit than do most buyers and suppliers. They can also offer loans to a larger number of clients as a result of having more appropriate systems and procedures and can offer a more diverse range of financial services. Yet in order to overcome the risk, operating cost, and informational constraints that have limited their involvement in agricultural lending to-date, financial service providers may need to establish linkages with suppliers and buyers; either directly or through intermediaries. Processors or suppliers that are able to set-up finance companies that offer credit to farmers may have an advantage over financial institutions as a result.

The paper is illustrated with examples drawn from a wide variety of countries, e.g. Costa Rica, Mozambique, Zambia, Zimbabwe, Kenya, Peru, Haiti and Malawi.

Author Pearce, D.
Number of Pages 18 pp.
Primary Language English (en)
Region / Country Global
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