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THE VALUE CHAIN FRAMEWORK, RURAL FINANCE, AND LESSONS FOR TA PROVIDERS AND DONORS

THE VALUE CHAIN FRAMEWORK, RURAL FINANCE, AND LESSONS FOR TA PROVIDERS AND DONORS. Bob Fries – ACDI/VOCA. 3/15/07. Key Messages. 1. The Value Chain Framework is useful for expanding financial services , not just for enterprise development .

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THE VALUE CHAIN FRAMEWORK, RURAL FINANCE, AND LESSONS FOR TA PROVIDERS AND DONORS

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  1. THE VALUE CHAIN FRAMEWORK, RURAL FINANCE, AND LESSONS FORTA PROVIDERS AND DONORS Bob Fries – ACDI/VOCA 3/15/07

  2. Key Messages 1.The Value Chain Framework is useful forexpanding financial services, not just for enterprise development. 2.   A value chain perspective helps donors and TA providers to focus on financial services that offer significant economic opportunity. 3.Financial institutions can learn from and engage more with value chain actors in order to develop new products and reach new markets.

  3. First some useful definitions Value Chain = the set of actors (private, public, and including service providers) and activities needed to bring a product from production to the final consumer. Value Chain Analysis an assessment of the actors, and factors influencing the performance of an industry, and relationships among participants to identify the driving constraints to increased efficiency, productivity and competitiveness of an industry and how these constraints can be overcome. Value Chain Finance = financial services and products flowing to or through value chain participants to address and alleviate driving constraints to growth.

  4. VALUE CHAIN FRAMEWORK AND FINANCE Global Retailers Financial Services • Overdrafts/ lines of credit • Investments, loans or savings to fund upgrading • Working capital to purchase inputs or products • Seasonal production loans National Retailers Exporters Processors/Traders Producers Input Suppliers

  5.  Financial Institution Suppliers Value Chain Suppliers Non-Bank Financial Institutions  Exporters/Wholesalers Processors Commercial Banks Grass-Roots MFIs, NGOs, Coops   Local Traders & Processors   Producer Groups Farmers  Input Suppliers Product and Financial Flows within the Value Chain Product flow Finance flow Many rural enterprises are demanders AND suppliers of financial services!!

  6. VALUE CHAIN FINANCE - THREE EXAMPLES Contract Farming/ Outgrower Schemes • Loans linked to purchase agreements • High value • Trader Credit • Loan between buyer and seller • Grains and high value Warehouse Receipts • Loans backed by receipts issued by safe, secure warehouse

  7. VALUE CHAIN FINANCE - OUTGROWER SCHEMES • Benefits • More secure product and market • Higher yields and quality • Bulk input purchases & product sales • Contracts for collateral, loan and sales terms, and product specs Global Retailers National Retailers Exporters Wholesalers • Learning • Business relations screen,train and monitorcustomers Processors/Traders • Lessons for Financial Sector • Loan terms and structure reflect economic activity • Financial Sector can increase trader credit through loans to larger VC actors Producers Input Suppliers

  8. VALUE CHAIN FINANCE LIMITS & POWER RELATIONSHIPS • Exploitative pricing – Cotton in Ghana • Market information – Tea in Kenya • Trader competition – Traders in Zimbabwe

  9. Vertical transactions Make money on VC products Presence and depth of outreach Terms, conditions and risk/cost management fit economic activity Working capital to smaller players Embedded financial services – lower marginal costs, production and marketing benefits Horizontal transactions Financial products Outreach Potential Sound financial practices and technology Working capital to larger players, investment capital Efficiency of unbundled services VALUE CHAIN ACTORS & FINANCIAL INSTITUTIONSCOMPLEMENTARY ROLES Rural Finance Through…. Value Chain Actors Financial Institutions

  10. e.g., Credit bureaus, Auditors, Tech service providers Macro-Level The Enabling Environment e.g., Policy Legislation, Regulation, Supervision Meso-Level Financial Infrastructure Micro-Level e.g., Banks, MFIs, Insurers Retail Providers Clients x IN CONCLUSION: To expand rural finance and enterprise growth ….. Investment Loans Upgrading Think outside between the boxes Financial Market Assessment Value Chain Analysis Financial Intermediation Embedded Services Financial Institutions Buyers and Processors Competitiveness Cost recovery & risk management Banks and Producers Banks and Processors Financial Sustainability Economic Growth

  11. Thank YouValue Chains and Rural Finance Paper URL:http://www.microlinks.org/ev_en.php?ID=7098_201&ID2=DO_TOPIC

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