Value Chain Finance, Rural and Agriculture Enterprise Development and Inclusive Growth

Some Practical Lessons for Policy Makers, Central Bankers, Donors and Other Stakeholders.

By Ramesh S Arunachalam , Rural Finance Practitioner

Value chain finance has become a buzzword and you hear it everywhere today in the development field and especially, in the agriculture sector – which has long been the primary economic activity in many countries in Sub-Saharan Africa as well as Asia. However, ensuring financial access for SUCCESSFUL agriculture production and rural enterprises development has always proved difficult. Often cited constraints are: (1) high transaction costs for both (borrower) producers/enterprises and lenders; (2) high risks faced by both of them and especially covariance risk for agriculture; (3) lack of reliable production/financial data and other information with regard to rural households engaged in agriculture and rural enterprises; and (4) financial products ill suited to the cash flows and livelihoods of the borrowers.

value chain agriculture

In fact, given the above, the last decade has seen value chain finance being promoted as “THE” approach to promoting access to finance for agriculture and rural enterprises. It is certainly not new and has had many previous avatars. And often times, value chain finance is introduced in a very narrow sense, without a broader understanding of the specific sector and this leads to minimal impact and ultimately, value chain finance is seen as a fringe activity. There have been numerous attempts in Asia and Africa, where a naïve introduction of a “special” value chain finance effort has been lost and never to be tried again…I try to capture some salient issues and lessons from value chain failures (I believe that failures teach us more than successes), without naming the specific projects/attempts…Read on

Let us first get a working definition of value chain finance (VCF) – VCF is typically defined as flow of financing within a sub-sector, among various value chain stakeholders, for the specific purpose of getting product (s) to market (s). Such a definition mandates relationships and commensurate exchanges between value chain stakeholders through vertical and horizontal linkages as well as coordination/cooperation and competitive mechanisms. This is very different from the mere provision of conventional financing, where one of the chain stakeholders (for example, a specific firm/entity and often primary producers) gains access to financial services independent of other stakeholders.

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