Value Chain Finance & Link to Microfinance

1. Value Chain Finance & Link to Microfinance By Miriam Cherogony eMFP Meeting Luxembourg

2. Outline of Presentation • The Problem • Rationale for Value Chain Financing • Agriculture Tripartite Arrangement • Example: Tobacco Value Chain in Malawi • Benefits of VCF • Challenges of VCF • Suggested Improvements • Recommendations eMFP Meeting Luxembourg

3. 1. The Problem • Urgency to create wealth for poor rural communities and promote economic growth by sustainably linking large numbers MSEs into profitable markets – reduce hunger & poverty; • Many developments partners view access to rural finance as essential tool for combating poverty and injustice; • Therefore, there is search for innovative ways to expand inclusive rural financing; • However, relationships between poverty and finance are complex and challenging. eMFP Meeting Luxembourg

4. 2. Rationale for VCF • An innovative way of delivering more and better financial services to rural producers and agribusinesses; • Financial institutions VCF- i) reduces the costs and risks, ii) diversifies lending risks, iii) another source of operational income; • Value chain actors - VCF opens access to larger loan sizes and new types of financial services e.g. savings and investment loans; • Smallholder farmers become creditworthy → enhanced incomes→actively engaged in rural development→poverty alleviation. eMFP Meeting Luxembourg

5. 3. Agriculture Tripartite Arrangements • An agricultural value chain encompasses the full range of activities and services required to bring a product or service from its conception to its end use. • VCF involves the financial needs of a sequence of productive value added activities from farm producers to final consumers, hence, the term, “From Farm to Fork” • In order to optimize VCF it requires the existence of tripartite institutional arrangements (Refer to Figure 1). eMFP Meeting Luxembourg

6. Tripartite Arrangements FIGURE 1 Financial Lender 5 1 2 6 Out growers/ small scale Farmers 3 Technical Service Providers (TSP ) 4 eMFP Meeting Luxembourg

7. Tripartite Arrangement Legend • 1 = Lender/FO provides financial services to farmers • 2 = Out growers/Farmers make deposits and repayment of loans; • 3 = TMP/TO provides technical and marketing services to farmers; • 4 = Out growers / Farmers sell produce to TSP and through the TSP to end buyers; • 5 = FO provides loans to TSP for its own operations and /or loans through TSP to farmer groups; • 6 = TSP repays own loans and /or loans of farmers collected at source when paying for produce purchased. eMFP Meeting Luxembourg

8. 4. Tobacco Value Chain in Malawi • Malawi Union of Savings and Credit Coops (MUSCCO) finances the farmers through the rural based SACCOs that work closely with the farmers associations; • Mostly in rural areas, Savings and Credit Coops (SACCOs) are the only organized financial institutions that farmers can access financial services for agribusinesses; • SACCOs lack long term capital to meet the demand, the apex MUSCCO, provides the funding but relies on the strength of the apex association NASFAM to organize farmers. eMFP Meeting Luxembourg

9. Example Cont.. • Working with National Small holder Farmers Association of Malawi (NASFAM) allows MUSCCO to concentrate on the provision of financial services to their membership base; • Farmers get technical assistance on business development skills and link to financial institutions to access financial services; • Auction Floors (tobacco market) helps MUSCCO in collecting loan repayments through stop order system. eMFP Meeting Luxembourg

10. 5. Benefits & Results of Collaboration • Increased access to financial services by farmers through SACCOs and MFIs; • Increased productivity by the farmers belonging to Associations; • Increased growth of loan portfolios that results in higher revenues for sustainability; • Increased farmer education on savings and loans management; • Increased farming business management skills; • Decreased loan default. eMFP Meeting Luxembourg

11. 6. VCF Challenges & Lessons (1) • Lack of innovative interventions that attracts financial institutions; • Unreliable prices for products result in great uncertainties for loan repayment and adequate margin for farmers. • Political interventions having a negative impact on the marketing of the agriculture produce. • Weak legal frameworks to curb side-selling of agriculture produce by the farmers participating in the value chain. • Attitude towards loan repayment and lack of saving culture hence loan default is still very. eMFP Meeting Luxembourg

12. VCF Challenges and Lessons (2) • Corruptive practices amongst the officials directly working with the farmers in the value chains. • Lack of binding contracts within the agriculture value chains; clubs are not legal entities to sign legally enforceable contracts - disband after default; • Lack of national identities and credit reference bureaus to check credit history of the borrowers result in inadequate client loan appraisals; • Lack of variety in agricultural activities due to unorganized markets for other agricultural products. eMFP Meeting Luxembourg

13. 7. Suggested Improvements • Public sector has to step in and improve/ formalize market conditions and legal frameworks; • Legal frame works and mechanisms should also be developed and enforced to curb side selling or cross boarder selling; • Innovative financial products need to be developed to reduce farmers appetite to side sell their produce (warehouse receipt systems). eMFP Meeting Luxembourg

14. 8. VCF Recommendations (1) • Importance of working with associations to reduce the risks associated with financing the value chain to increases bargaining power for the farmers. •  Screen and organize small farmers into larger groups for:- • Disbursement of inputs and loans • Monitoring and evaluation • Facilitate or delivery of extension services • Collection and aggregation of product to market • Facilitation of repayments to financiers eMFP Meeting Luxembourg

15. VCF Recommendations (2) • Design sustainable value chain finance interventions- using identified opportunities and constraints; • Strengthen institutional capacities of actors- governance & management, HR competence, information flow, ability to forge partnerships and alliances with different cultures and expectations; • Identify sources of risk reduction and required incentives to mitigate risks; • Identify ways to improve access to longer- term agricultural finance through risk sharing basis. eMFP Meeting Luxembourg

16. Recommendations (3) • Banks should be developing tailored products e.g. term finance facilities for agribusiness clients; • Design methodology for improving relationship between financial institutions and farmers; • Create a viable platform for farmers continued education to improve on their adoption of new technology; • Leverage use of technologies such as mobile phones development and biometrics to identify borrowers . eMFP Meeting Luxembourg

17. Thank You for Your Attention Rural Finance Knowledge Management Partnership (KMP) / IFADAFRICA IFAD Kenya Country Office, UN Lane, Off UN Avenue P.O Box 67578 – 00200 Nairobi, Kenya Tel: + 254 (20) 762 1028 Cell: + 254 722 111 237 Email: m.cherogony@ifad.org or mcherogony@ifadafrica.org skype: miriam.cherogony eMFP Meeting Luxembourg