AfDB Experiences in Value Chain Financing

1. AfDB Experiences in Value Chain Financing Workshop on Enhancing Exports’ Competitiveness though Value Chain Finance Indaba Hotel and Conference, Johannesburg, Republic of South Africa November 14-15, 2012 Josephine Mwangi

2. Introduction Primer on Value Chain Financing Value Chain Finance Flows AfDB Experience in VCF Micro-Finance (MF) Modes of VCF delivery Challenges to VCF New Bank Initiatives in Value Chain Financings Some Lessons Learned Conclusions and Recommendations Presentation Outline

3. Introduction • The ADB is a Multilateral Development Bank whose shareholders comprise; • 53 African countries (Regional Member Countries – RMCs) and • 25 Non-Regional Member Countries • It was established in 1964 and officially began operations in 1967. • AfDB overarching objective is to contribute to poverty reduction and social progress in its RMCs by: • mobilizing and allocating resources for investment in the sustainable economic development of its RMCs; and • providing policy advice and technical assistance to support development efforts of the RMCs.

4. Primer on Value Chain Financing Value chain in agriculture A set of activities that bring a basic agricultural product from production in the field to final Consumption  “Farm to Mouth” Value chain finance Flows of funds to and among the various links within a value chain

5. AfDB AfDB Value Chain Finance Flows Enabling Business and Financial Environment Financial and Information Flow ----------------------------------------------------- Input Processing Consumption Production Distribution ----------------------------------------------------- Physical Flows Finance and Support Services AfDB AfDB

6. AfDB Experience in VCF • Bank, for a long time focused on the • agricultural production part of Value chain: • Irrigation infrastructure • Agricultural inputs • Research and extension services • Rural roads • Provision of credit resource • Capacity building

7. Micro-Finance (MF) • An important aspect of the Bank’s value chain finance (VCF) is MF • Financed through the following Instruments • (i) Pubic Sector loans and/or grants to: • small scale farmers for crop and animal production; • Small scale entrepreneurs for off farm income earning activities = marketing, processing • National Development Banks and Microfinance institutions, Savings and Credit Cooperatives(SACCOs) for on-lending • Farmer/ Community Groups  group loan security • Through out-grower arrangements or service providers

8. (ii) Private Sector loans and grants through: • Sovereign loans through Lines of credit (LOC)to National and Regional Microfinance Institutions, Banks or Savings and Credit Cooperatives (SACCOs) i.e DFIs, for on-lending to Small and Medium Enterprises • Microfinance Institutions for Capacity Building interventions • Under both Public and Private Sector, activities are financed either: • As a component within a bigger agriculture or • infrastructure Project; or • standalone microfinance/rural finance projects

9. Modes of VCF delivery Cash, Voucher system In kind – agriculture inputs Public Sector Private Sector Cash Guarantees

10. Challenges to VCF through MF • 1. Weak capacity of national and regional Micro-finance institutions • Lack of collateral for smallholders • Collapseof many agricultural development banks • Failure of smallholders to pay back loans = crop failure or mismanagement of resources • Inaccessibility of majority of the rural population due to poor infrastructure • High Risk of lending to smallholders • High cost of lending from MFIs • Challenging business environment = illiteracy, political interference, market inaccessibility etc

11. New Bank Initiatives in Value Chain Financings • Fund for African Private Sector Assistance (FAPA): Managed by the Private Sector - grants for technical assistance, capacity building and seed capital investment == development of micro- small- and medium-scale enterprises (MSME) • AgvanceAfrica = An initiative to provide capital to sub-funds targeting Small & Medium Enterprises (SMEs) in the agribusiness and agriculture sectors • The African Trade Fund (AfTra) which promotes trade competitiveness and economic growth of RMCs through enhanced integration into regional and global trading systems == promotes development of MSMEs

12. AfDB current focus on value chain financing….. • With launching of the Bank’s Mid-Term Strategy (2008-2012) followed by the Agriculture Sector Strategy (2010-2014)……. • AfDB refocused its development emphasis from agricultural production to: • (i) Development of rural infrastructure in order to: • Connect more rural people to markets, traders and input suppliers • Raise crop productivity through irrigation, increased use of inputs • Provide storage to reduce Post Harvest loses

13. Support to Agro-Processing for: • Value addition • Increase produce shelf life • Expected outcome ……. Increased Incomes, and food security • …….. Need for more microfinance to support these activities, especially post harvest handling activities • Natural Resource Management • To preserve resources

14. Some Lessons Learned • The concept of value chain and value chain financing has gained momentum in recent years. • Public/private Partnership is important now more than ever. • 3. There is need for strong partnerships among development partners in order to complement each other along the various stages of value chain financing • 4. The need for value addition of African agricultural produce cannot be overemphasized • 5. Need to employ systemic processes to ensure VCFsustainabilityby empowering the value chain actors (large and small farmers, processors, exporters)

15. Lessons Learned Cont’d 6. All players/actors, in value chain (including farmers), should appreciate and fully play their role. 7. Effective VCF will enhance production and open up opportunities for local production and thereby enhance the promotion of exports’ competiveness hence creating the ripple effect of developing and growing local economies and reducing poverty levels.

16. Conclusions and Recommendations • 1. Every project should include: • Agro-processing activities • Marketing infrastructure including transport and marketing • Partnership with the private sector • = this calls for more resources to be put under Micro-financing • 2. More efforts needed to strengthen capacity of African DFIs • 3. More investment needed in rural infrastructure to connect rural population to local, regional and international markets. • 4. Support ongoing efforts by RMCs to establish “Agriculture Commodity Exchange” platforms

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