0. Innovative Supply Chain Finance
Jinchang Lai
Principal Operations Officer, and Lead for Financial Infrastructure, Finance and Markets, East Asia & Pacific Region
Ulaanbaatar, December 15, 2014

1. Example of a Supply Chain Rice Production
Source: World Bank Cambodia

2. How do Lenders See a Supply Chain?
Length of the supply chain (value chain); value-added of each stage Who are the chain actors? How many? Their dependency on the chain performance Governance of the chain: strength of the chain leader; and allocation of risks and benefits Competitiveness of a chain -- efficiency, synergy, reliability and innovativeness -- and its positioning in the market Strength of social capital Vulnerability to policy, regulatory and systemic risks Commitment to environmental, safety and social responsibilities

3. Linkages can be Powerful for Lenders
Modern productions are mostly done through collaborations among supply chain players
The movements of goods and services along supply chains result in changes in accounts receivable (AR) and inventory
These (and the associated information) can be leveraged to make financing available for suppliers, processors, buyers and services providers
The presence of financing can strengthen social capital, increase the efficiency and competitiveness of a chain
The greater information efficiency, stronger incentives and the organized payment/settlement mechanisms reduce transaction cost

4. Example of a Supply Chain Finance System Poultry Production

5. Why Supply Chain Finance?
Lending institutions want the information mechanism and incentive structure embedded in a chain
They want to leverage “other people’s existing networks” for the distribution of products and services
And ... even better ... to make the clients “captive”
Also ... to substantively shift risk exposure vis-a-vis small borrowers to the larger suppliers or buyers
Whether or not an economy has an active supply chain (value chain) finance market depends on:
Enabling environment (Can lenders do it conveniently?)
Equitable share of benefits and risks (What do they get out of it? Do lenders get one or more benefits above?)

6. Why Supply Chain Finance?
Supply chain finance is essentially a way of organizing accounts receivable and inventory finance (plus some equipment finance, e.g., lessors lease a specific brand of chain equipment with risk sharing and buy-back arrangements) – All in the space of movables finance
While “movable asset finance” (movables finance) is a conceptual term, there are many business names and brand names for the various credits secured by movable assets
Supply chain finance is one of those business names

7. Who are Involved in Supply Chain Finance?

8. Example of a Supply Chain Finance Advertisement

9. Example of a Supply Chain Finance Suite (I)

10. Example of a Supply Chain Finance Suite (II)
Rolled out by a bank with a brand name of “Win-Win Chain”, which contains seven products (as of 2013):
Future inventory financing: Lender controls borrower access to inventory; for procurement purpose
Inventory rights pledge loan: Based on WHR, Bill of Lading, etc.
Inventory pledge loan: Secured by a changing pool of inventory
Accounts receivable financing: Based on a pledge of AR or factoring of AR
Cross-border payments financing: Processing and financing in one package
Global confirmation financing: Combines with credit enhancement

11. How Do Lenders Grow Up?
Stage I: Lending to the supply chain actors individually; occasionally, clients introduce their supplier or buyer to the lender as potential clients
Stage II: Consciously leveraging expertize/relationship in and organizing clients along supply chains (value chains); systematically using chain information and incentives to evaluate, structure, deliver and manage exposures
Stage III: Actively promote non-credit products and services; even use chain relationship to distribute other players’ products for a fee
Stage IV: Organize all actors in an Internet-based platform for optimal solution to each client; digitalization of information, services and financing

12. What is So Special about Agri Supply Chain Finance?
Systemic risk; and the need for insurance
Uneven pattern of cash flows
Suppliers, aggregators/buyers as well as the government are the major providers of credit, not just financial institutions
Core chain participants are mostly individuals/households
Lenders and/or chain leaders may need “conduits” to reach them; conduits can be associations, cooperatives, joint liability borrowing groups, 3rd party networks, etc.
May not have formal security agreements
Payment and cash management mechanisms can help to tie in small clients

13. A New Generation of Players
The rise of e-platforms:
Digitization of ARs and WRs
The visibility and transparency of value chains have increased greatly with technology – creating a fresh incentive structure
Entry of the payment services providers – e.g., in a good position to provide “cash advance”
The extraordinary rise of e-commerce players:
What are the Information and Incentive advantages that an e-commerce player have in comparison to the traditional commercial banks?
What “Controls” and even “Possessions” that an e-commerce player has over a borrower or a collateral?
Example of a simplest product: A Finance Company lends against the receivables of suppliers with its parent company as the account debtor

14. Example of an Online Supply Chain Finance System

15. A New Generation of Players An Illustrative Case
Group A is a major e-commerce player with two large online shopping platforms. Not long ago, it started a finance subsidiary to provide loans mainly to the MSME suppliers/sellers on its platforms. The loans are said to be all unsecured. By August 2014, about half a million MSMEs have been supported.
The payment process for online shopping: buyer places an order  shop accepts order and delivers the goods  the purchase amount moves from the buyer’s online wallet to an escrow account controlled by Group A  money moves from the escrow account to the seller’s online wallet after buyer clicks to indicate satisfactory receipt of goods or automatically 7 days from the date of purchase.
Group A also has power to expel or block a shop on its platforms and debit directly against the accounts of the borrowers.
Questions: What is the nature of the credit provided by Group A? Is it a secured loan? Is this supply chain finance (movables lending)?

16. How can Mongolia Catch Up?
How far is Mongolia from the more matured markets?
Some traditional lending with “intensive controls” can already be done today
Major developments will need serious secured transactions reforms (STR) – Can private enterprises (particularly SMEs) borrow all unsecured? Can they all rely on real estate as the basis for credit?
Other key ingredients:
Knowledge development and training
Government promotion and support (e.g., refinancing, insurance funding, potentially e-platforms)
Friendly credit market and payment system regulations
Development of support services

17. Thank You !
The views and judgments of this presentation are those of the author. The conclusions and judgments contained herein should not be attributed to and do not necessarily reflect the views of IFC, or its management and Board of Directors, or the countries they represent. The author, by means of this document, is not rendering any professional advice or service, and shall not be responsible for any loss sustained by any person who relies on this presentation as a substitute for professional advice or service.

18. Agribusiness - One of IFC’s Strategic Pillars
We make a difference by:
Enhancing Productivity and Efficiency: focus on food security via increased production, waste reduction, and income enhancement
Promoting Inclusive Development: focus on small holders, women, nutrition and risk management
Supporting Environmental & Social Sustainability and reduce the sector’s future footprint

19. Six Sectoral Themes Drive Our Agenda
Water
Global Irrigation Program
Inputs (e.g. seeds)
Small Farmers
Inclusive supply chains
Global Food Security Program (GAFSP)
Land
Princ. of Resp. Agri Investment
Africa Hybrid Investments
Ukraine/Brazil
Urbanization
Safe food processing & efficient supply chains
Food affordability
Animal Protein
Mitigate impacts of full value chain (e.g., feed efficiency)
Seafood
Nutrition & Innovation
Food ingredients
Fortified foods and drinks

20. IFC’s Approach to Financing Agribusiness
Investment Services
Equity and long-term loans
Partial credit guarantees and risk sharing facilities
Syndications
Direct Financing: Corporate and Project Financing
Direct financing of agribusiness firms
Build long-term partnerships with emerging industry leaders
Promote best practices in corporate governance and environment and social sustainability
Implement programs to support individual farmers and distribution companies
Provide advisory services that add value in IFC’s financing package
Indirect Financing: Traders and Financial Institutions
Expand reach to small farms and businesses, which are essential to the sector but too small for IFC to finance directly
Build on local market knowledge of intermediaries (regulations, business customs, and client/ supplier reputations)
Channel financial and advisory services to end users via intermediaries
Develop and promote sustainability best practices through intermediaries
Advisory Services
Strengthen farmers, small businesses, supply chain linkages and infrastructure
Facilitate market development of local supply through helping farms meet quality and quantity requirements
Raise standards of corporate governance and business transparency
Support the development and uptake of eco-standards

21. IFC Agribusiness Portfolio
$6 billion well-diversified committed portfolio as of June 30, 2013
REGIONAL BREAKDOWN
SUB-SECTORAL BREAKDOWNS