Page 45 - Banking Finance July 2023

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the strength and relationships within the agricultural value regardless of the presence of formal financial institutions.
chains responsible for bringing an agricultural product to its Participants further down the value chain provide loans to
end users. It is considered to be the most suitable method small holders with or without the involvement of financial
for catalysing credit flow to the agricultural sector in institutions. Forms of internal value chain financing include
developing countries and offer an opportunity to expand aggregator credit, input supplier credit, marketing company
lending scope for financial service providers, and reduce costs credit, and lead firm financing. This lead firm may borrow
and risk associated with agriculture finance. from a financial institution but there is no connection
between the financial institutions and upstream value chain
Role of Agriculture Value Chain participants (i.e. farmers, aggregators)
The primary role of an AVC is to bring products to the final
External value chain finance is that which is made possible
consumers, with value added to the product at each stage
by value chain relationships and mechanisms: for example,
along the chain. Delivering agricommodities quickly and
a bank issues a loan to farmers based on a contract with a
directly to final consumer gives smallholder farmers
trusted buyer or a warehouse receipt from a recognized
important higher income earning opportunities. A vital cog
storage facility. When actors outside the value chain, such
in increasing farmers' income will be the extent of credit
as financial institutions, provide finance to the value chain
penetration to the ultimate farmer. With changing
based on relationships within the chain, this finance may be
consumer preferences towards branded, well-packed, safe
referred to as external financing. A typical example is when
and healthy food there has been increasing focus on
a bank provides a loan to a producer based on a contract
organized agriculture value chains and their financing.
with a buyer. The entry of financial institutions and external
Farmer producer organisations (FPOs) and supermarket
financing can benefit all value chain participants and buyers
chains will play a very important role in this revolution.
do not need to use working capital to provide finance to
producers; producers can access finance without meeting
Agriculture Value Chain Approach
typical collateral requirements; and banks can enter
The value chain concept allows integration of the various profitable new markets without the risk and transaction
players in agriculture production, processing and marketing. costs associated with lending to smallholders directly.
It defines the various roles of players while at the same time,
scope and purpose of partnerships that can be established. The type of AVC model to be selected depends on:
The chain
Internal value chain finance is that which takes place within
The capacity of the different stakeholders in the chain
the value chain such as when an input supplier provides
The interests of the stakeholders
credit to a farmer, or when a lead firm advances funds to a
market intermediary. Finance will flow in value chains The socio-economic and political context

Stages of the Agriculture Value Chain

BANKING FINANCE | JULY | 2023 | 41