Value Chain Finance
A value chain is the series of steps and related actors that transform raw materials into finished products. “Value chain finance,” according to Miller and Jones (2010), refers to the flows of funds to and among the various links within a value chain. More specifically, they mention that value chain finance is 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.
The term is broad and refers to both internal and external forms of finance that are developing along with the agricultural value chains that they serve. The “internal value chain finance” is one which takes place within the value chain (e.g., an input supplier provides credit to a farmer, a lead firm advances funds to a market intermediary). The “external value chain finance” is that which is made possible by value chain relationships and mechanisms (e.g., a bank issues a loan to farmers based on a contract with a trusted buyer) (Miller and Jones 2010).
Gashayie and Singh (2015) believe that value chain finance offers a challenge to expand the financing opportunities for agriculture, improve efficiency and repayments, and consolidate value chain linkages among participants in the chain. Also, they argue that the potential is becoming greater as there is an increased involvement of the private sector in the value chain finance. Moreover, some have suggested that financing along the agro-food value chain that links small farms to global value chains is the best antipoverty strategy, increasing food security and sustainability (see, e.g., Mergos 2015).
The “agricultural value chain finance” aims to structure financing along the value chain effectively, as well as maximizing efficiency and minimizing costs and risks. For doing this, it adopts a systemic approach that analyzes all the actors, processes and activities associated with the chain. Thus, Soundarrajan and Vivek (2015) state that, to improve the quality and efficiency in financing agricultural chains, the following steps are required:
- • Identify the financing needed to strengthen the chain.
- • Tailor financial products to suit the needs of the participants in the chain.
- • Reduce the financial transaction costs through the direct discounting of loan payments at the time of product sale.
- • Use value chain linkages and knowledge of the chain to mitigate risks to the chain and its partners.
Quiros (2006) has identified as prerequisites for a successful value chain financing the existence, among others, of the following:
- • Buyers who are willing to participate actively in the value chain
- • Strong financial institutions that (a) are committed to the rural sector, (b) have branches close to the producers and (c) have staff with the appropriate know-how to manage the process
- • Reliable market data through public sources and/or other value chain participants
- • Appropriate legal systems that enforce contracts and provide landown- ership documentation