Value chain finance
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Input on Value Chain Finance during the VCD in FED: Conversations on Framework ++ workshop in Bacolod City, Philippines March 6-9, 2012
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Value chain finance
- 1. Value Chain Finance (VCF) Resource person: Lisette van Benthum - FSAS
- 2. Value Chain Finance – What is VCF? – Which actors are involved in VCF? – Priorities in VCF – Specific Financial Products for VCF – Role of ICCO
- 3. Value chain finance refers to: - financial products and services - that flow to or through any point in a value chain - in order to increase returns on investment, growth and competitiveness of that value chain. Source definition: MicroLinks Source image: KIT – Value Chain Finance – adapted by FSAS
- 4. The Challenge: the Missing Middle Commercial Large Scale Agriculture Number of Farmers Value Chain Volume Corporates International Banks Fully Commercial Value Chains Local Mainstream Banks Producer Emerging Value Chains Organisations & (start-up) SME’s Social Lenders Social Lenders Smallholders Subsistence Microfinance Family Capacity Building Farming & VC Development
- 5. Reasons for existence of the Missing Middle & Challenges in Rural Micro Finance - Perceived risk (agriculture – start-ups) - No collateral - No solid equity base - Lack of (long term) trade relationships - High transaction costs - Product characteristics do not meet demand characteristics - Subsidized financial services
- 6. Priorities in VCF 1. Stimulate mainstream financial institutions to provide financial services to value chain actors. (matchmaking, risk-rating, product development, temporarily reduce risk through partial guarantees, etc.) 2. Securing market linkages & risk mitigation (Value Chain Development, cap building in handling price, production & marketing risks & development of insurance products). 3. Temporary provision of debt financing to value chain actors by social lenders and/or donors. (Oikocredit, Triodos STF, ICCO, etc. – equity, loans, participations)
- 7. Financial Product development for VC-lending • Type of financial need • Period of financial need • Possibilities for repayment in line with business character • Securities demanded • Processing speed of loan application • Speed of loan release • Complexity of loan documentation
- 8. Type of Fin For which activity Instrument Financial Needs ? Assets Harvest buying Trade Loan – Short term Loan for Exp Loan Portfolio Guarantee Capacity building Inputs and/or land preparation Household costs (f.i. education/ health) in pre- Short-term loan harvest season
- 9. Examples of Specific Adapted VCF Products Trade Finance (Purchase Order loan)
- 10. Examples of Specific Adapted VCF Products Warehouse Receipt Systems & Leasing
- 11. Examples of Specific Adapted VCF Products Coop as inter- mediate for MFI lending to individual farmers
- 12. Challenge for donors in Value Chain Finance Determine ways to support value chain finance without undermining private- sector solutions. – Interventions should be geared toward facilitating private-sector solutions, – Addressing market failures and – Ensuring a functioning enabling environment – Not becoming a player within the value chain itself.
- 13. Role of donors & facilitators in Value Chain Finance 1. Facilitate information flow from the value chain to financial markets and vice versa. 2. Introduce and link Value Chain Actors to financial institutions 3. Identify risk reduction methods or products 4. Enable training and technical assistance to value chain facilitators 5. Stimulate suitable & affordable financial product development
- 14. ICCO’s Role – Missing Middle Stimulate Financial Services Providers - Stimulate local FS providers to service ICCO FED- partners (match making, risk rating, risk mitigation, information flow, product development) - Stimulate social FS providers like Oikocredit, Triodos Sustainable Trade Fund and Annona to service ICCO FED-partners. - Loans, Guarantees, Participations Enabling environment for Value Chain Finance - Stimulate development of risk rating, risk mitigation methods, measures and products - Facilitate capacity building and tools for sound business economic management by the value chain actors - Stimulate information flow about opportunities in specific agricultural sectors to the local financial sector.
- 15. ICCO’s Role - Micro Finance - Train staff of MFI’s on VC analysis and VC Finance - Support product development/testing for lower part of VC - Engage MFI’s in stakeholder collaboration for value chain with clear role description - Engage with network on lobby for proper enabling environment for rural loans, leasing products
- 16. Chain Responsibility Commercial Large Scale Agriculture Value Chain Volume Corporates International Banks Fully Commercial Value Chains Local Banks Local Mainstream Banks Producer Emerging Value Chains Organisations & (start-up) SME’s Social Lenders Smallholders Subsistence Microfinance Family Capacity Building Farming & VC Development
- 17. ICCO’s Financial Instruments Guarantees to loans (# 106 active guar = 10,5 million €) Loans (# 13 loans = 2.5 million €) Participations (#10 part = 2.1 million €) Seed Capital Grants Grants
- 18. Target Entities • Entities which, through their core-activities, generate revenue. • Those entities which aim to and are likely to become financially self sustainable through their own economic activities in a reasonable time-frame. • Those entities that through their core-business have large developmental impact
- 19. Challenge for donors in Value Chain Finance Determine ways to support value chain finance without undermining private- sector solutions. – Interventions should be geared toward facilitating private-sector solutions, – Addressing market failures and – Ensuring a functioning enabling environment – Not becoming a player within the value chain itself.