More than 140 participants discussed key role of finance for value chain development and emphasized the innovations in financial instruments and service.
The Briefing looked at finance as a key driver for value chain development and discussed the concept of agricultural value chain finance, new opportunities for financiers, and the new context of value chain finance in Africa – including the development of ICTs that support innovative applications. It examined the innovations in financial instruments and services and presented concrete examples of more current applications on the ground which demonstrate the potential of value chain finance for shaping African agriculture.
Addressing the rural finance gap through agricultural value chain finance
Value chain finance is an approach that takes a systemic viewpoint, looking at the collective set of actors, processes and markets of the chain as opposed to an individual lender-borrower within the system. Decisions about financing are based on the health of the entire system, including market demand, and not just on the individual borrower. While much of the emphasis in a value chain finance approach is on the health of the chain and its value-adding transactions and linkages, a well-rounded assessment of all borrowers is still critical.
Increases in finance and investment are needed at all levels of the food chain, especially to increase the access to finance by smallholders. To be successful, the value chain finance approach requires a solid financial entity with appropriate institutional infrastructure, a clear commitment to rural finance, a supportive enabling environment, and a viable market of value chain activities that are suitable for this type of financial product.
The small-scale businesses of asset-poor farmers at the beginning of the chain are intimately connected with larger businesses of traders, food processors and supermarket chains at the end of the chain. Thus, it is crucial to address the financial gap that hampers growth, limits agricultural development and result in a loss to the financial sector, which ignores millions of potential rural clients.
Agricultural value chain finance offers an opportunity to reduce cost and risk in financing and reach out to smallholder farmers, expand the financing opportunities for agriculture, improve efficiency and repayments in financing, and consolidate value chain linkages among participants in the chain. The specific opportunities that financing can create within a chain are driven by the context and business model and the relative roles of each participant in the chain.
For financial institutions, value chain finance creates the impetus to look beyond the direct recipient of finance so as 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 chain. Value chain finance can help the chains become more inclusive, by making resources available for smallholders to integrate into higher value markets. Finance that is linked with value chains is not new and some types of trader finance, for example, have been around for millennia; what is new is the way it is being applied more systematically to agriculture, using innovative or adapted approaches, tools and technologies.