Facilitating Smallholder Farmers’ Market Access
In the OIC Member Countries
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intensive, high-quality input use within a more rational and comprehensive production,
marketing, and finance framework. In addition, the enhanced transparency obtained with
respect to commodity prices has the potential to improve farmers’ bargaining position
with traders in determining sale price. The buyer security models are structured so that
the bank relies upon the buyer contracts (verbal or written) to help secure its loans. The
downside of these arrangements is farmers’ dependence on a single buyer: When the
buyer disappears or defaults on his or her obligations, the whole supply chain collapses
and takes farmers’ repayments with it.
VCF models are divided into four categories, according to the characteristics of different
value chains: (1) tight VCF with output buyers; (2) loose VCF with output buyers; (3)
nucleus outgrower models; and (4) VCF with input suppliers.
In tight VCFs, side-selling is very costly or even impossible. These characteristics are also
applicable to most nucleus outgrower financing models, in which nucleus farms typically
give outgrower farmers access to processing, transport, and markets for cash crops (such
as the model described for oil palm in the Indonesia case study). Financing for tight value
chains is generally easier and more prevalent than financing for loose value chains, which
typically feature easily marketable, staple crops. There are few success stories of VCF in
staple crops such as maize, cassava, wheat, and groundnuts, however. For those crops, the
side-selling risk is naturally higher, because there are many buyers and crops can be sold
in local markets.
Value chain finance with input suppliers. Banks interested in financing smallholders
may choose to pursue lending directly to local agricultural input dealers but leave the
provision of credit to individual farmers completely in the hands of the agro-dealers
themselves. In India’s e-choupal (village input kiosk) system, the State Bank of India (SBI)
partnered with a private company (ITC) to make affordable loans available to farmers for
input purchases. ITC facilitates all documentation and verification procedures, thereby
reducing associated costs to the bank and allowing the bank to offer more favorable loan
terms to more farmers. ITC also allows SBI to manage and monitor credit risk effectively
through the local knowledge and support of platform operators and ITC data on farmers’
transactions.
Factoring. Factoring is based on a company selling its accounts receivable (A/R) to a bank
or factoring company at a discount. Factoring differs from the VCF models described
previously, because the A/R are generated only when goods have been delivered but cash
payment is still forthcoming. The company selling its A/R realizes benefits by receiving
cash earlier than it would under the terms of the receivable and can thus use the cash
received for immediate investment in working capital.
Trade financing. Trade financing essentially provides credit to finance international
trading transactions of small and medium agricultural enterprises. Banks may assist by
providing various forms of support. For example, the importer’s bank may provide a letter
of credit to the exporter or the exporter’s bank, providing for payment upon presentation
of certain documents, such as a bill of lading. Alternatively the exporter’s bank may make a
loan by advancing funds to the exporter on the basis of the export contract.