Page 37 - Banking Finance July 2020

ARTICLE

Risk for Banks in Value chain Finance and its Mitigation

Type of Risk description Risk Mitigation Measures
Production risks These arise from a variety of factors By employing a comprehensive chain approach that
(input supplies, lacking or late credit, low looks beyond the borrower to the health of the chain,
quality standards, improper storage and the bank is better informed about the capacity of the
packing, weather risks, diseases, etc.) chain partners and linkages, including producers'
capacity to ensure adequate supply in terms of quantity
and quality
Supply risks This refers to situations where Strong producer organizations (farmers 'cooperatives)
producers (farmers) may not honour and/or Group solidarity systems (mutual guarantees
their contractual supply Obligations. based upon savings) provide some assurance that
A commonly contracts will be honoured and the risks of side-selling
Observed problem in contract Farming Minimized.
is -side-selling, which derails the built-in
repayment mechanisms for farm credits.
Finance risks These relate to the non repayment of Non-repayment of credit to chain actors can be greatly
credit provided to Farmers, other reduced by incorporating a lead Actor considered
producers or other value chain actors. trustworthy. Such actors help instil and Ensure
accountability.
Marketing risks These relate to the inability to sell on Fixed contracts throughout the chain help stabilize
time, in the right Quantities and/or at turnover, especially when dependence on One market
an Acceptable quality standard. can be avoided.
Sales or export agreements are a strong asset in
negotiations with financiers, especially when they are
also financing other agribusinesses within the value
Chain.
Climate risks These relate to shocks produced by Agricultural insurance, including weather index
weather, such as droughts or Floods. insurance, has shown potential to help smallholders;
Weather shocks can trap farmers and input suppliers manage low- to medium frequency
households in poverty, but the risk of covariate risks such as Drought or excess rainfall.
shocks also limits farmers' willingness to
invest in measures that might boost their
productivity and Improve their economic
situation.

Benefits of agriculture value chain which may prompt larger-scale players and formal financial
actors to enter into a new market once the investment
finance opportunities are realized.
There are multiple benefits which flow from successful value
chain financing arrangements. Through its ability to reduce Suggestion to improve value chain
risk and enhance incentives, value chain finance can enable
the sustainable delivery of services, for example ensuring finance in agriculture

that farmers, brokers and wholesalers have continuous Y The development goals of the government and/or bank
access to a line of products they need that are delivered in must be clear before Decisions can be made about the
a timely manner and meet certain specifications. A successful target group, region or sector, and value chain-specific
arrangement can often provide a demonstration effect considerations.

BANKING FINANCE | JULY | 2020 | 37