Innovations in value chain fi nance have been largely driven by the devel- opments in value chains themselves such as integration and formalization of relationships, the globalization of agricultural food chains, the attention from donors, facilitators and others on the role that small farmers can play in these chains, and the willingness of fi nanciers to look at new ways to sup- port them. Further, with the growth of microfi nance, social investment, and other forms of non-conventional funding, creative forms of fi nancing are be- ing developed, and existing fi nancial institutions have become more fl exible and resourceful. These efforts are supported by donors who frequently offer loans or grants, guarantees, capacity building and other forms of assistance
that can aid fi nancial institutions in high risk, low collateral lending. With the deepening concerns around poverty alleviation along with the growing food crisis and the realization that even very small farmers can make an important contribution to global food security, it is anticipated that value chain develop- ment and fi nance will continue to change and progress. Adaptation will spur increased refi nements and innovation in value chain fi nancing, leading to new products and services that are responsive to the situation and context, and continue to mitigate risk for the lending institutions. Many of the in- novations noted here are in their infancy, and continued streamlining and enhancements are expected.
The willingness of fi nancial institutions to examine value chain relation- ships and make fi nancing decisions based on third-party agreements rather than conventional collateral is one of the most signifi cant innovations in ex- panding agricultural fi nance to poorer farmers and agro-enterprises. Whether it is an understood arrangement with a buyer like Hortifruti, a formal contract with a facilitator such as TechnoServe, or vertical integration with a global player as with Starbucks, direct lending to farmers can be improved because of these linkages. Financiers become more confi dent in the face of the secure markets offered by the lead fi rms that drive the value chain and ensure an out- let for products. Furthermore, this has led to third-party lending where bank- ing institutions will provide loans to businesses higher in the chain – such as processors – knowing that the fi rm will lend to trusted suppliers. This reduces the due diligence and operational costs of lending on the part of the bank, while also mitigating their own risk.
The collateralization of agricultural outputs, and the formalization of their value, is another signifi cant innovation in value chain fi nance. With the growth of managed warehouses – both low-tech fi eld warehouses and sophis- ticated supply chain management establishments – lenders gain confi dence in the preservation of goods, and their sustained or increased value over time.
This is especially helpful to farmers and others in the chain that become able to maintain ownership beyond the high season, and sell products when mar- kets are not glutted and prices are more favourable. This leads to higher re- turns and enhanced ability to repay loans and be profi table, with instruments like warehouse receipts and forward contracting being innovated as a result of this trend.
The recognition that value chain businesses, particularly smallholder farm- ers, have critical fi nancing needs beyond credit has been a noteworthy devel- opment in value chain fi nancing. The potential to offer a range of fi nancial services is bolstered by the strength of value chains, and the spread of risk across large numbers of producers and multiple chains. Innovations in weath- er, crop and health insurance have helped increase their use for risk reduction, including smallholder farmers, enabling them to ‘push the envelope’ on pro- ductivity and cash-cropping.
Although well established as a fi nancing approach for the ‘unbankable’ in general, microfi nance has begun to innovate ways to become more active in
agricultural lending. Traditionally, microfi nance institutions (MFIs) have fo- cused lending on low-risk, fast-return businesses such as petty trading, but as competition in the industry has increased, there has been greater motivation to look at higher risk lending to farmers and agro-enterprises. MFIs have begun to work with farmers’ groups and agribusinesses in the chain to understand their needs and risks, and then to adapt loan terms, collateral and repayment mechanisms to match the value chain and demand. In addition to adaptation of existing loan products, MFIs have also adopted new fi nancing instruments, such as leasing arrangements and fi nancing of warehouse receipts, and sav- ings products to help smooth incomes, accrue assets for times of need, and to reinvest into their businesses.
Price risk reduction strategies and instruments have also undergone exten- sive innovations – with highly structured mechanisms such as national spot and future exchanges. One signifi cant innovation is the use of Internet and cell phone applications to be able to not only share information on current and futures prices much more broadly, even among small producers, but also allow them to make use of that information for making forward contract sales.
This in turn allows the option to borrow funds against the sales contracts and also to hedge risk of price reductions at the time of harvest or delivery of the products.
Financing of supporting services to agricultural value chains – from input and equipment suppliers to extension services and telecommunications – has also evolved. With a fi rm understanding of the value chain and all its inter- connectedness, indirect fi nancing to the chain through support services and products, and even partial grants, offers interesting options for value chain growth. For example, the use of vouchers to stimulate equipment supply chains (e.g. micro-irrigation technologies) are being trialled in Africa, and offer sig- nifi cant potential for increased productivity and profi tability of businesses in the chain. Innovation in fi nancing of supporting services also extends to the funding of suppliers who can provide non-cash disbursals of needed inputs to farmers, repayable in-kind or cash at the time of sale. In some cases, the input supplier and the buyer are one and the same, leading to tighter integration of the chain and more secure repayment.
Timeliness and low transaction costs for accessing fi nance are critical areas of fi nancing to agriculture. The Kisan credit card (KCC) in India, shown in Box 5.1 is an example of fi nancial product innovation wherein the growers can readily access fi nancing from the fi nancial system (commercial banks, ru- ral banks and cooperative banks) and are covered both under crop insurance and under health insurance at a nominal premium paid by the lender as loan component.
A holistic household view of fi nancing is creating new opportunities for lenders and borrowers. Although there has been a greater emphasis on the farm as a business, and the need for households to separate farm income and expenses from family expenditures, there is also an enhanced understanding of household income sources. In developing countries, a loan made to an
individual is frequently a loan to an extended family with diverse sources of income. So, although a loan might ostensibly be made to purchase seeds and fertilizers, repayment of that loan might come from a range of sources such as salaried or daily employment and from non-agricultural enterprise activities such as trading and small-scale manufacturing. Household income is taken into consideration in assessing the risk of lending, and offers possibilities to families that might otherwise not be considered creditworthy.