Feed the Future
This project is part of the U.S. Government's global hunger and food security initiative.

5.2.14. Types of Value Chain Finance

1. The provision of credit, savings, guarantees or insurance to or among value chain actors

  • Seasonal loans or advances from buyers to farmers
  • Agro-processors advancing credit to farmers
  • Input providers supplying in-kind loans to farmers
  • Buyer out-grower schemes that involve credit (often alongside inputs)
  • Short-term, seasonal loans for working capital from microfinance institutions
  • Long-term fixed asset loans from financial institutions
  • Partial guarantees from financial institutions to leverage credit to value chain actors

Example: In Paraguay, the MFI El Comercio is lending to smallholder farmers as a complement to the in-kind credit many receive from input suppliers; these input suppliers or ‘silos’ store products and also provide inputs as in-kind credit. El Comercio provides loans to smallholders already working with the silos to increase land cultivation, pay for transportation services and harvest crops. Collateral for the farmers’ loans is the buyer contract with the silo, stored produce at the silo, and/or guarantees from the silo. The silo’s contract stipulates an agreement to purchase future crops either at a price set when the contract is signed or at market price at a specified time. In some cases, the loan repayments are made directly by the silos from the proceeds of the farmer’s production. This model has faced challenges during implementation, however; the most significant being loan default due to bad weather and poor soil conditions. Nevertheless, the strategic alliance between El Comercio and the silos held strong. The silos supported El Comercio in the recovery process, paying for some of their clients and offering additional guarantees. The silos also continued to provide inputs to farmers for the next production cycle – an important factor that can assist a farming household stabilize its income stream and hopefully repay its debts. [1]

2. The creation of strategic alliances through financing extended by a combination of value chain actors and financial institutions

  • Market facilitators partner with banks to develop a credit franchise
  • Commodity exchange links future buyers and sellers to reduce producers’ price and marketing risks
  • Bank lending to cooperatives and farmers’ associations based on forward contracts with farmer groups
  • Market facilitator links buy-back arrangements as guarantee for fixed assets (such as drip irrigation)
  • Financial institutions create ‘risk-sharing model’ through trust fund.

Example: Buy-back arrangements have been successfully used in India as a way to leverage the relationship between distributors, manufacturers and farmers to increase access to drip irrigation systems. In India, one financial institution drew on the existing relationships between small farmers, drip irrigation distributors, and sugarcane manufacturers to expand its outreach to producers. In this scenario, drip irrigation distributors received loans in the name of specific farmers who then used the funds to purchase drip irrigation systems. In this system, the sugarcane processors (who have a prearranged agreement with the farmer) repay the bank by subtracting the loan (principal and interest) from the sugarcane sales of the farmer/borrower. This mechanism has lowered the risks and transaction costs of lending to farmers.[1]

3. The offering of tools/services to manage price, production or marketing risks

  • Screening and/or collection services for banks interested in lending to affiliated producers
  • Warehouses that use ‘receipts’ for secured products, which producers can use as collateral for loans
  • Insurance companies that manage production risk for producers and lenders

Example: One example is the credit franchisee model being developed by ICICI bank (the largest commercial bank in India) and International Development Enterprises India (IDEI). Although still in the testing stages, this approach has had some limited early success. In this model, credit franchises conduct loan appraisal, determine loan size, process, manage, and collect loan repayments from farmers (ICICI bank staff provide training in these areas to franchisee staff), franchises also contribute an equity amount from which they can leverage up to 10 times from ICICI bank to lend to farmers. In turn, credit franchisees can include a margin of up to 3 percent on each loan to cover their expenses of each transaction. The loans always stay on ICICI’s books. ICICI bank has used drip irrigation dealers to become their credit franchisees. With this model, the farmers have access to tailor-made loans (not the standard loan terms and sizes offered by most banks) to purchase drip irrigation systems – with the prospect of increasing productivity rates and crop diversification. The model offers an opportunity for ICICI bank to increase their rural customer base in India. It also holds the prospect of reducing the transaction costs and risk of lending, since the credit franchisees use local knowledge of client credit histories to process loans.[1]

Footnotes

  1. 1.0 1.1 1.2 Diaz, Lillian and Jennifer Hansel. Practitioner-Led Action Research: Making Risk-Sharing Models work with Farmers, Agribusineses, and Financial Institutions, SEEP Network, January 2007