Home » Industry » Unlocking Resources Through Value Chain Finance

A value chain consists of a series of activities that add value to a final product, beginning with the production, processing or elaboration of the final product, and ending with the marketing and sale to the consumer or end user.

The inter-dependent linkages of the chain and the security of a market-driven demand for the final product can provide suppliers, producers, processors and marketing companies with more secure access to procurement and sale of the products.

This reduces costs and risks of doing business and improves access to finance as well as other services needed by those within the value chain.

Value chain finance is the provision of finance throughout the series (or chain) of transactions that result in the product arriving at its final market.

Value chain finance therefore explains the flow of funds to and among the various participating links within the chain.

In other words it is any or all of the financial services, products and support services flowing to and or through a value chain to address the needs and constraints of those involved in that chain, be it a need for finance, a need to secure sales, procure products, reduce risk andor improve efficiency within the chain.

Value chain finance is a comprehensive approach which looks not only at the direct borrower but rather analyses the value chain and those within it, and their linkages in order to best structure financing according to those needs

The linkages also allow financing to flow up and down the chain. For example, inputs can be provided to farmers and repaid directly from the sale of the product without having to go through a traditional loans process.

Access to adequate and timely financial services for all actors in the chain has proven to be a key element for success.

This implies that not only large producers and traders but also small producers need access to appropriate financial services to make optimal use of value addition and income generation.

The ability to develop successful value chains in an economy has the potential to promote the development of various innovative financial instruments. These financial instruments then can be used to fund the whole chain rather than individuals within the chain hence increasing the potential to increase output in the economy, and create more jobs.

Some of the financial instruments that can be developed at the back of value chains include various trade finance instruments, warehouse receipts, factoring, etc and risk mitigation products related to the product such as forward contracts and guarantees.

Through the process of value chain financing, some sectors which usually find it difficult to get funding from the financial system can easily be resourced because of their links with other organisations within the value chain.

For example the financing problems currently faced by the informal sector players can also be easily resolved through g linkages between the formal and the informal sector.

Despite SMEs’ g interest in credit, banks’ profit orientation may deter them from supplying credit to former because of the high transaction costs and risks involved but with linkages to the formal sector this can easily be resolved because the risks can be watered down or mitigated due to the links between the informal and the formal structures.

Taking a closer look at the majority of what is termed the informal sector, one can realise that there are at times these informal players are suppliers of the raw materials to the formal sector hence creating a value chain system.

It can also be shown that some of the informal sector players are currently involved in undertaking part of the production process of formal firms through subcontracting.

In this case the informal sector is part of the value chain because it’s contributing to the production of the final product.

As long as the formal sector grows, and especially if it is competitive, then the informal sector will grow as well.

Its growth also depends on the resources available, which might not be accessible to the company in the informal sector but can easily be obtained by the one in the formal sector.

What needs to be done is that a deal can be struck where the company in the formal sector provides some sort of guarantee for any amount borrowed by the one in the informal sector or alternatively funding can be aanced through the company in the formal sector that pays to the one in the informal sector for the work done.

Another area requiring urgent attention with regard to development of value chains is the agricultural sector.

It has been proven in most countries that g agricultural value chains create livelihoods, increase incomes, and promote economic growth.

By supporting development of domestic industries, improving local markets, and expanding export opportunities, there is need for the stakeholders to allow all actors along the value chain including farmers, input suppliers, wholesalers, transporters, food processors, and lending institutions to become viable partners in their countries’ economies, generate employment, and improve food security.

A good example of a value chain model is represented by current initiatives by the Zimbabwe Agriculture Development Trust who have set up the Create Fund in facilitating the raising of capital for lending to Zimbabwean agriculture value chain should be commended and duplicated by other players.

Their lending is done through the inputs window, the output marketing window and the storage or processing window.

The main target beneficiaries of the fund should be the smallholder farmers who under normal circumstances do not have access to agricultural inputs, resulting in inefficiencies, lowered incomes and sometimes food insecurity. Such challenges are easily overcome using appropriately structured value chain financing models such as the Create Fund,

Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on abel@baz.org.zw or on numbers 04-744686 and 0772463008

Source : The Herald