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

92 Coates and Hofmeister
Box 3.1
Case Study: Buyer and Supplier Finance in Ghanaian Cocoa
Perhaps one of the best examples of short-term trade credit for agricultural
producers is the cocoa value chain in Ghana. Cocoa is a huge industry in Ghana,
and the purchase of produce from producers is dominated by a market of private
sector buying companies (licensed buying companies or LBCs) with licenses to
sell to the state-owned marketing monopoly.
These LBCs routinely provide significant amounts of short-term credit to
producers for the purchase of the required inputs (for example, fertilizers and pesticides)
before the growing season. In return, the cocoa growers agree to sell the resultant
cocoa harvest to the LBCs at an agreed price. The capital and interest are repaid
to the LBC through the proceeds of the sale and the balance goes to the farmer.
Similarly, credit can also be provided by the input supplier. In another example
from Ghana, one of the country’s largest suppliers of fertilizer and other agricultural
inputs is providing supplies on credit to members of a major cocoa growers
association, with repayment due following the harvest.
Source: Coates et al. 2011b.
Such trade relationships exist all over Africa, wherever there are strong
private sector players involved in the value chain with robust relationships
with producers. The depth of trade credit, however, is inherently
limited by the size of the balance sheets of these firms. Trade credit
devours working capital, and most firms will reach their limits sooner
or later.
Building trade credit into buyer and supplier finance. Buyer and supplier
finance is simply the leveraging of trade credit facilities with the involvement
of a bank. The mechanism allows the extension of significant
amounts of credit by using the combined balance sheets of both the firms
and the bank.
The advantages of this type of finance are clear to the bank:
• The intermediary firm has close links with producers at a grassroots
level, and it is not essential for the bank to replicate the costs of infrastructure
to reach this market.
• The intermediary firm has already identified a pool of creditworthy
borrowers who have developed a repayment record.