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Theme 2: Value Chains and Financial Intermediation: Some Theory and a Case Study about Creditworthiness, Supermarkets and Small Producers in Central America

Topic : Customer Centricity, Financial Service Provider

Renewed interest in the role of value chains in agricultural credit flows generates questions about the role of governments and donors in promoting rural financial deepening. Is value chain finance a substitute for financial intermediaries or are value chain contractual relationships a trigger for deeper intermediation? The choice of approach will have significant consequences on rural economic growth and the inclusion/exclusion of small farmers from finance and high-value added markets. The research examines whether shallow financial intermediation is a barrier to the participation of small producers in modern value chains, whether the contractual arrangements associated with participation in the chains help in creating and enhancing creditworthiness, and whether these indirect influences of value chains (rather than the traditional interlinked credit contracts) create externalities that broaden the supply of intermediation services.

Preliminary conclusions are based on a new conceptual framework and a case study of small producer suppliers of fresh fruits and vegetables to the procurement centers of a supermarket chain in Central America. Supermarket managers, bank officers, and producers were interviewed in depth in three countries. Direct credit from the chain to the producers has been insignificant, but the explicit or implicit contracts with the supermarket chain have become a strong intangible asset that improves the ability of borrowers to signal and the ability of lenders to recognize creditworthiness. This is strengthened by a set of compatible incentives among the chain, bank, and producers. The paper examines how specific dimensions of contractual arrangements influence various types of credit risk (volume, price, payment for sales, product rejection, consumption smoothing) and thus improve loan transaction conditions. Influences of country environments are identified.

The results have implications for those in charge of promoting credit, value chain, and business development/farmer extension programs. They help identify the role of each approach in improving rural incomes.