Banks as well as donor agencies have found that it is hard to lend to farmers. Agriculture is rife with risk that can hurt farmers' capacity to reimburse their loans, and even if farmers can reimburse, government policies have not always encouraged them to do so. As a result, over the past decades most dedicated agricultural banks have failed, and many financiers have become sceptical about the wisdom of lending to farmers. Nevertheless, farmers will need to feed the ever-expanding cities of developing countries, and they will only be able to meet growing demand if they find farming a profitable venture and if they can invest in expanding their capacity.
Value chain finance does not rely on the capacity and willingness of farmers to reimburse, but rather, builds this capacity while sidestepping the problem of unwillingness-to-pay by collecting reimbursements from buyers further up the value chain. Well-developed value chains provide a win-win for farmers and consumers – for farmers, in that they have an assured market with attractive prices, while for consumers, they receive the goods they wish at an acceptable price and at the time they require them. By financing the value chain, a bank not only unlocks value creation, but also creates strong incentives and mechanisms for value chain participants to reimburse their loans. Value chain finance makes agriculture bankable again.
In order to engage in value chain finance, banks need to understand agriculture – the constraints and risks that farmers face, the mechanisms of processing, the particularities of consumer demand. An investment in learning, certainly, but one that is likely to pay off, not just for banks but also for the countries in which they operate. The reality of increasing food demand is inescapable, and lack of access to finance is a constraint that needs to be overcome in order to avoid food shortages.
Fortunately, there is already much experience in various forms of agricultural value chain finance, and banks willing to learn can inspire themselves from the many success cases. Farmers' organizations on the other hand should work with banks and their regulators to ensure that their members can benefit from the many innovative value chain approaches that have been tried and tested in recent years.
These innovations – none of which have become omnipresent – have ranged from the financing of contract farming operations (in which farmers grow "to order" for specific buyers, and are supported in various ways) to lending backed by structured trade (in which certain standards become generally accepted, permitting farmers that can meet these standards to link in various ways with reputable buyers and attractive markets).
The rapid development of mobile applications is underpinning the potential of innovative value chain finance. But most banks still need to change their mindset when it comes to agricultural finance, and then have to develop the skillset to engage profitably in value chain finance.
Value chain finance enables profitable value chains from farmers to consumers, and supports their development by permitting chain participants to invest in the improvement of their operations. Value chain thus helps farmers, including small-scale ones, to engage productively with the market, and generate surpluses that will permit their sustainable growth. Linked with sound value chains and supported with value chain finance, family farms can become profitable, growing ventures that provide opportunities not just for the current generation of farmers, but also for future ones.
International Conference Revolutionising finance for agri-value chains
CTA Brussels Briefings on Agri-value chains Finance
Revolutionising Finance for Agri-Value Chains
Value chain finance: Beyond microfinance for rural entrepreneurs