Pro-Poor Value Chain Development - Capacity.org

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Value chain financing
A key bottleneck to business development is the lack of appropriate financing
mechanisms. Each actor in a value chain, whether large of small, has different
financing needs. Smallholder farmers need funding to purchase inputs and
improve production. Traders and processors need support to scale up and diversify
production, improve quality and adapt to market demands. These divergent needs
require the availability of a range of innovative financial services. Value chain
financing therefore seeks to analyse the needs of different actors, and develop
solutions that are tailored to meet their specific needs. It is important to note
that financial solutions in this case go beyond providing grants or loans. Financial
institutions can also provide other valuable services such as advice and knowledge.
As part of its support for value chain financing, BOAM developed three types of
approaches:
• Identifying existing sources of value chain finance;
• Developing new financing mechanisms;
• Providing investment funds for innovations and upscaling.
Identifying existing sources of value chain finance: BOAM supported close to 30
private sector organisations to access equity or debt financing from diverse sources,
including banks and micro-finance institutions, other non-bank financial institutions,
or a combination of these. BOAM support consisted of, among other activities,
prospecting, screening, and business diagnostics and planning. In addition, some
value chain actors provided financing to others as a means to offset potential risk. A
fruit buyer, for example, might provide working capital loans or advances to farmers
to ensure timely delivery of the final product. Their incentive to lend was not the
profitability of the loan itself but securing the delivery of a promised product. In the
same way, traders sometimes provided in-kind loans (in the form of inputs) as a
normal business service to smallholder farmers with limited liquidity. This was not
only aimed at building trust and a stable client market but recognised the fact that
providing access to credit was one of the best ways to encourage cash-strapped
farmers to purchase inputs.
Developing new financing mechanisms: BOAM supported the development of
innovative financial services in collaboration with private sector actors within the
dairy and honey chains. Rut & Hirut, a milk-processing firm, received support to
develop and implement a financing scheme for milk suppliers to secure access to
quality animal feed. Operating as a revolving fund, the new mechanism was jointly
owned by the milk suppliers who deducted the advances made from the fortnightly
milk payments.
Similarly, BOAM assisted the honey processor BezaMar to obtain a bank loan and
establish a credit line for out-growers to invest in quality beehives. Ultimately, the
investments in improving accessibility to improved beehives will benefit more actors
along the value chain as the quantity and quality of honey supplies continues to
improve.
Providing investment funds for innovations and upscaling of the tested innovations:
The BOAM programme also set aside funds to kick-start innovative financing within
selected value chains. This led to the development of two specialised funds, namely:
• A pilot business innovation fund to help value chain actors test new ways of
doing business. Due to the risky nature of investments in this area, the BOAM
programme typically financed 80% of the total investment cost, whereby the
beneficiary agreed to share lessons learnt as well as any innovation with other
value chain actors. In this way BOAM’s investment could be leveraged through
sharing the resulting innovations across an entire sector.