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

94 Coates and Hofmeister
farm inputs such as credit or extension services to the supplier in return
for the guaranteed supply of agricultural products—sometimes show
these features. Such schemes also offer the producers economies of scale
in bulk input purchasing and logistics, together with marketing power.
Buyer and supplier finance in practice. The bank must first identify suitable
intermediary firms—either input suppliers or produce buyers. These
firms would ideally be those with whom they already have solid banking
relationships. For the purposes of reaching producers directly, the intermediary
firm would have direct trading relationships with producers and/
or producer groups; however, for the purposes of value chain finance this
is not necessarily the case (box 3.2).
The bank needs to agree on an appropriate credit line and terms and
conditions in line with the market risk profile and competitive conditions.
It needs to develop a simple and streamlined credit process for the intermediary
firm, ideally with a basic application form that the intermediary
can use to “score” the proposed customer in line with the agreed credit
policy. For example, criteria could include a specified minimum length of
time that the producer/producer association has had a relationship with
Box 3.2
Case Study: Development of Supplier Finance in Ghana
A bank in Ghana had a large local supermarket as a customer. The supermarket
was keen to expand its sales of horticultural produce from local producer groups,
but supplies were unreliable and limited. It wanted to improve its supply chain by
making formal arrangements with producer associations to supply an agreed
quantity and quality of produce and price in return for helping prefinance production.
Rather than relying entirely on its own balance sheet, it had approached
the bank with a view to helping with a credit line of its own.
Although the bank would have been a reluctant lender directly to small agricultural
producers, it was comfortable in banking a larger supermarket customer
with formal management and accounting structures. The bank was willing to
increase its working capital credit lines to the bank on the back of a clear explanation
of the trading model. This expansion of working capital for the supermarket
was used to help increase prefinance production and to improve the working
capital arrangements of its key horticultural suppliers.
Source: Coates et al. 2011b.