Building a successful agri-value chain financing

By Bob Aston

Agri-value chain finance offers an opportunity to reduce costs and risk in financing, including outreach to smallholder farmers. For financial institutions, value chain finance creates the impetus to look beyond the direct recipient of finance to better understand the competitiveness and risks in the sector as a whole and to craft products that best fit the needs of the businesses in the value chain.

At the same time, value chain finance can help chains become more inclusive, by making resources available for smallholders to integrate into higher value markets.

The term “value chain finance” refers to the flows of funds to and among the various links within a value chain. It relates to any or all of the financial services, products and support services flowing to and/or through a value chain to address the needs and constraints of those involved in that chain, be it to obtain financing, or to secure sales, procure products, reduce risk and/or improve efficiency within the chain.

Smallholder farmers planting

The strategy for developing or strengthening value chains depends on the business model.  The business model includes the drivers, processes and resources of the entire value chain system, even if the system is composed of multiple enterprises. The business model concept is linked to business strategy and business operations.

If value chain finance is to be successful, the value chain must be viewed as a single structure, with the model of this structure providing a framework for further analysis. It is also essential for the business model to be flexible.

Special emphasis must always be placed on models that allow the full participation of smallholders in value chains. The best strategy or model to use depends on the circumstances and maturity of the respective value chain.

The various players also need to look into the following; product financing, receivables financing, physical asset collateralization, risk mitigation products, financial enhancements and innovations.

Innovations like process, financial, technological and policy innovations can greatly help in reducing costs and risks as well as improving services.

Creating a successful value chain is always an act of entrepreneurship. A value chain strategy is more robust if developed by a leading actor within the chain. It is always important to identify competitive production areas and tailor products to buyers’ needs.

Important considerations in designing value chains and value chain finance interventions include governance, power relationships among actors in the chain, control and sustainability of the chain, and the main beneficiaries of the intervention.

Farmers planting

It is also important to build the capacity of small-scale producers and other weak partners in the chain to support growth towards maturity in the value chain. Building the capacity of weaker members of the value chain may also involve increasing the understanding and capacity of stronger partners so that they can become chain participants.

It is also important to identify initiatives with a strong business case. The underlying industry must be competitive if interventions are to be sustainable. Designing effective interventions requires an appreciation of the structure and dynamics of the target value chain.

Value chain finance cannot be successful when there are no clear development goals. This should be done before decisions can be made about target group, region or sector and value chain specific considerations.

The various value chain players also need to ensure that value chain and segmentation analysis is conducted and that the study involves an analysis of the value-added potential in the chain.

Creating conditions for synergy between grant and debt finance is also important. This will help in ensuring financing of promising value chains and subsectors. Essentially, this will strengthen or build actors’ creditworthiness thus supporting the development goals of increasing financial access and inclusiveness.

This will also go a long way in creating an environment in which commercial financial operators could enter the market to provide value chain actors with the financing they need to improve the operation of the chain.

Value chain finance offers an opportunity to expand financing for agriculture, improve efficiency and repayments in financing, and strengthen or consolidate linkages among participants in value chains as well as improving the quality and efficiency in financing agricultural chains.