Whereas financial transactions within a value chain are not new production finance could be considered "value chain finance"several emphases distinguish a value chain finance approach. These include improving finance at specific points in the value chain to increase the competitiveness of the entire value chain and involving multiple actors and leveraging relationships to lower or mitigate risk.
Value chain finance refers to financial products and services that flow to or through any point in a value chain that enable investments that increase actors' returns and the growth and competitiveness of the chain. Whereas financial transactions within a value chain are not new production finance could be considered "value chain finance"several emphases distinguish a value chain finance approach.
These include improving finance at specific points in the value chain to increase the competitiveness of the entire value chain and involving multiple actors and leveraging relationships to lower or mitigate risk.
Taking a value chain approach entails considering the risks and returns of the finance supplier along with the risk and returns of the value chain actor demanding finance.
As Figure 1 illustrates, value chain actors themselves, banks, microfinance institutions, other non-bank financial institutions, or a combination of these actors can provide or facilitate financing to a value chain. These actors may participate in a value chain financing arrangement for different reasons, and these reasons determine the ways in which they are willing to facilitate financing for a value chain upgrading investment.
Often in value chain finance, some form of strategic alliance is established between the financial provider and one or more value chain actors to reduce transaction costs and lower risks that otherwise impede access to traditional financial services. In such arrangements, private sector actors may directly finance a particular investment or cash flow need, or they may help facilitate financing from a more formal financial institution.
It is important to understand how value chain governancerelations and linkages are structured to respond to market opportunities, because these factors will determine the viability of a financing arrangement.
Value chain finance works best where there is strong end-market demand, as well as transparency, trust and strong and repeated inter-firm transactions. The stronger the relationships, the more readily players in the value chain can rely on their relationships to facilitate access to finance.
The most common ways value chain actors facilitate financing include: Value chain actors may have useful information about potential borrowers.
Value chain actors may play a direct role in loan transactions. They may be positioned to disburse loans on behalf of the financial institution in-kind or cash and loan repayments may be channeled through them as well. These roles can help to lower transaction costs and reduce likelihood of arrears and default.
Value chain actors may provide a form of "soft" collateral. Unlike "hard" collateral such as land titles, "soft" collateral can be in the form of direct formal or informal guarantees or co-signing, assigning value to inventory in a warehouse, etc.
Value chain actors may also provide some alternative which is acceptable to a financial institution in the case that legal collateral is not available to secure the loan.
Purchase orders and buyers' contracts may provide a reasonable guarantee of repayment to the extent that a financial institution would waive traditional requirements.
Even when buyers' contracts are not transferable and thus are not truly a substitute for collateralthey can be important nonetheless to the lender, since they signal creditworthiness and thus decrease the default risk. Demand for Finance within Value Chains Value chain finance is useful for ensuring that businesses have liquidity so they can meet market demands - whether that be to maintain or expand operations or invest in upgrading to access new market opportunities.
The demand for financing by businesses can be varied. For example, a farmer may borrow against a warehouse receipt to purchase a new tractor; a shoe maker may take a forward contract to produce a new line of shoes; or an industrial tire manufacturer may access a line of credit in order to increase production to meet a lucrative order under a tight deadline.
It is important to consider both the financing needs of a value chain actor as well as their ability to access financing from traditional providers. Some actors may not be well served by the formal financial sector because of atypical financial demands, lack of collateral, perceived or actual high repayment risk or cost of outreach.
As an example, in the cases above, the farmer may have lacked collateral to qualify for a loan, the shoe maker's business may have been perceived as too risky and the industrial tire manufacturer may not have been able to rapidly access credit needed to meet tight deadlines. Rural and agricultural enterprises commonly have the greatest difficulty in accessing financial services from traditional providers for the reasons mentioned above.
This makes any production-level demands for financing challenging and can limit value chain development and growth. Many of the financial innovations which comprise "value chain finance" were developed specifically to bridge this financial gap by lowering costs and risks of financing for value chain upgrades.
However, a recent stocktakin  of rural financial innovations revealed that the most effective mechanisms were structured to address financial gaps that are broader than a specific value chain financing requirement. In cases where the production unit is a household, there are often financial demands beyond the value chain enterprise.
These demands impact household liquidity as cash resources are allocated across a set of interlinked production and consumption needs. In such cases, value chain competitiveness can be indirectly tied to the ability of the household, as a production unit, to access financing for other investments and purchases and manage their overall household cash flow needs.
These financial demands can relate to both consumption and investment related. Households have financial commitments for both regular and unexpected consumption and social expenses such as food, school fees, health care and funeral expenses.Three case studies of commodity value chain financing in India are documented in Chapter 4 which has three sections (Maize in Section 1, Milk in Section 2 and Section 3 .
Financing the SME Value Chains Asad Ata, Malaysia Institute for Supply Chain Innovation, MIT Global SCALE Network This research work is built upon case studies from Malaysia SME financing benefits both the financial institutions and the enterprises involved.
Regional. cases, known approaches were adapted to the financing of value chains, as in the case of Islamic financing (chapter 4) and the liquidity injections through agents on a commission basis show.
In. “DEVELOPING AND FINANCING EFFECTIVE AGRICULTURAL VALUE CHAINS” Experience from CRDB Bank Plc Samson Keenja, CRDB Microfinance Services Company Limited, Dar es salaam, Tanzania INTRODUCTION Agriculture is the leading economic sector in Tanzania, providing a livelihood to 80% of the population.
competitive value chains, which in turn provides a solid business case for financial institutions to begin serving new markets and thereby scale up the services. The Value Chain approach to Agricultural Financing. The Aquaculture Case study In proffering solutions to Agricultural financing using value chains, there is the need to first highlight the solutions to the challenges above, and afterwards using a Aquaculture as a case study, breakdown how these solutions can be implemented.