Financial Sector Development in Africa: Opportunities ... - World Bank

90 Coates and Hofmeister
Sources of Working Capital for Producers
Catalyzing private sector credit for small agricultural producers in Africa is
one of the most vexing issues for policy makers and economic development
professionals focused on livelihood development and poverty alleviation.
By and large, financial institutions are very reluctant to lend to this group
in particular. Quite aside from their sector-specific concerns in relation to
agriculture, most financiers are unwilling to address this market because of
a number of real or perceived concerns, including the following:
• Concern that much small-scale agriculture is not very profitable on the
whole, and the opportunity cost of sacrificing market share in other
fast-growing and profitable banking markets is not warranted
• Concern that the operating and distribution model required to costeffectively
reach small producers is a difficult, long-term, and large
investment compared with the likely payoff
• Concern that small producers do not have the right values and behaviors
in relation to financial services—specifically poor repayment
records and a low propensity for other product purchases—to increase
customer profitability for the banks.
The result, of course, is that most small agricultural producers have no
access to formal financial services from the leading financial institutions
of the country. Short-term working capital shortages are therefore often
covered by credit from extremely expensive informal credit sources, further
undermining producer profitability.
Currently producers in some of the better-structured value chains
receive trade credit from larger private sector players such as input suppliers
(for example, suppliers of fertilizers and pesticides) or buyers
(including agriprocessors, exporters, and traders). By “better structured”
we mean value chains that are short and efficient (for example, agribusiness
tends to deal directly with producers or producer groups rather than
being intermediated by layers of “middlemen”), value chains that are well
organized (for example, those with strong and stable relationships
between agribusiness and producers), and value chains that have good
economies of scale (for example, those in the areas of purchasing, transport
and logistics, and processing, which are often generated by bigger
agribusinesses). The chapter suggests that building on the existing relationships
between agribusiness and producers by adding buyer finance
(also known as buyer credit) and supplier finance might constitute a vital
structure in bridging this gap between the big balance sheets of the