Presentation is loading. Please wait.

Presentation is loading. Please wait.

Supply Chain Financing: Scope for Rural Finance Interventions Rural Finance in Afghanistan and the Challenge of the Opium Economy Kabul, Dec 13-14, 2004.

Similar presentations


Presentation on theme: "Supply Chain Financing: Scope for Rural Finance Interventions Rural Finance in Afghanistan and the Challenge of the Opium Economy Kabul, Dec 13-14, 2004."— Presentation transcript:

1 Supply Chain Financing: Scope for Rural Finance Interventions Rural Finance in Afghanistan and the Challenge of the Opium Economy Kabul, Dec 13-14, 2004 Douglas Pearce Head, Financial Sector Team Department for International Development (DFID), UK

2 Supply Chain Financing Globally = the Principal Source of Credit for Agricultural Production 50% of the rural popn. in El Salvador that accesses credit, does so from wholesaler, retailers, processors Leading companies in Southern Africa provided $91m in credit to 530,000 households Kenya Tea Devt. Agency: 400,000 small farmers in fertilizer credit scheme, disbursing $15m annually 270,000 smallholders received input credit from tobacco & cotton companies in Mozambique 2002/03

3 Supply Chain Finance/Agribusiness Credit: Principal Mechanisms Contract Farming and Outgrower Schemes Buyer (trader, processor, wholesaler, exporter…) provides inputs on credit, linked to purchase. Trader/Supplier Credit Inputs on credit, or Advances during growing season for range of uses (in cash or in kind) Inputs on Credit Produce

4 Examples of Supply Chain Financing Hortifruti, Costa Rica [Contract Farming] Specialist wholesaler for supermarket chain Technical assistance & information, calendar of production, financing etc to pool of growers Aim = to ensure quality, quantity, and timing Salaam, Afghanistan (trader advances) Trader gives advance payment as loan against future delivery of agreed amount of crop (e.g. opium) Aim = to secure supply, and to reduce price risk for trader Inputs on Credit Produce

5 Characteristics of Supply Chain Financing/ Agribusiness Credit Credit linked to supply or purchase transactions Primarily input credit (seasonal credit or short-term advances), not financing for other uses Credit alongside inputs, advice, market access Interest rates not always applied Delinquency & default can be a problem (side-selling) If traders have too much market power, can abuse position

6 Can we build on Supply Chain Finance to extend Rural Finance? Agribusiness credit has key advantages to offer: Outreach Client Knowledge Reduced Risk And has deficiencies that merit interventions: Narrow Product Range Scale of credit operations limited by access to credit, technical know-how, market linkages etc Side-selling Access for smaller and more marginal farmers can be limited Abuses of market power (unfavourable terms, indebtedness leading to loss of land)

7 Possible Donor Interventions 1. Facilitate the entry of financial institutions Support the development of brokers/agents Assist traders/processors to set-up finance companies Small Farmer Associations 2. Assist Traders/Processors to learn from microfinance: Upgrading client-monitoring systems Sub-contract lending activities, leaving scope for other types of loans? Adopting microfinance techniques 3. Improve the enabling environment for rural finance

8 Linkage Model: Broker or Loan Service Agent Specialist intermediaries that can lower the risk and cost of dealing with small farmers Loan service agents (for agri- business or financial institutions) Brokers, that link farmers to financing [NB have to face thorny question of working with rural hawala dealers] Inputs Loan Produce Selection & Monitoring Broker or Service Agent Repayments Fees or

9 Trader/Processor Finance Companies Processors or wholesalers can set-up finance companies to conduct credit operations Better-placed to improve and widen credit products and increase efficiency and scale Credit Facility Produce Inputs

10 Small Farmer Associations Donor support to specialized agencies that promote market-oriented associations Associations can increase scale of production reduce costs for lenders facilitate TA and input provision Increase bargaining power of small farmers $ InputsProduce

11 Positive Policy & Enabling Environment Critical Credit bureau Instruments to reduce default risk Collateral registration procedures/warehousing facilities Transport and communications infrastructure Market access and functioning supply chains are critical for viability of alternative crops

12 Opium-related Indebtedness – Additional Options Use community mechanisms e.g. jirga, to negotiate debt restructuring, with additional loan/grant (re-)financing in severe cases Loans or grants for buying back mortgaged land/assets? [NB need to monitor loan use, as money is fungible] Remittances (from seasonal or longer-term migrants) also a key source of funds to break cycle and support alternative activities

13 For Donor Interventions to be effective Build capacity of existing and potential traders/processors or agents, rather than creating new institutions [Also NGOs as facilitators, not as market players] Grant and technical assistance should be timebound, transparent, and open to >1 trader/processor/agent Financial institutions better able to finance traders/processors, agents, or farmer associations, rather than individual small farmers Better understanding & monitoring of financial flows needed Dont subsidize loans/inputs to farmers – undermines financial sector/agricultural markets Interventions should increase competition


Download ppt "Supply Chain Financing: Scope for Rural Finance Interventions Rural Finance in Afghanistan and the Challenge of the Opium Economy Kabul, Dec 13-14, 2004."

Similar presentations


Ads by Google