Value Chain Finance

This brief note is based on “Value Chains and Their Significance for Addressing the Rural Finance Challenge”, microREPORT by Bob Fries and Banu Akin – which can also be downloaded below. It suggests a value chain is the series of actors and activities needed to bring an agricultural product from production to the final consumer. Value chain finance then arises when credit or other financial services flows through the actors along this chain – this may or may not include support from formal financial institutions.

The paper contends that identifying relationships along the value chain, mitigating constraints, exploiting opportunities for value chain finance, and exploring how formal financial institutions can enter the equation can improve the overall effectiveness and efficiency of the value chain. Such interventions, if designed well, can increase the competitiveness of small producers, a range of agricultural and agribusiness enterprises.

This note aims to provide an overview of the nature and potential of value-chain finance, as well as some of the lessons learned in using value-chain finance to promote agricultural sector development.

It begins with discussion on value chains, from both a supply and demand perspective, and how they are financed. Finance is split between direct value chain finance and indirect value chain finance; and the complimentary nature of the two is also considered. The note then profiles some common forms of value-chain finance – trader credit, contract farming/outgrower schemes and warehouse receipt systems – and discusses the advantages and disadvantages of each. The note ends by highlighting the implications for program design, drawing on recent experience using value chain analysis in Mozambique.

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