Value Chains and Financial Intermediation: Some Theory and a Case Study about Creditworthiness, Supermarkets and Small Producers in Central America

This paper examines dimensions of the expansion of access to financial services for small and medium agricultural producers in developing countries, by focusing on ways in which:

• Existing value chain relationships facilitate access to a broad range of financial services;
• Expanded financial intermediation facilitates increased smallholder participation in modern chains.

The paper states that:

• The structures of vertical integration and implicit contracts created around supermarkets are examples of new value chains;
• Supermarkets are revising the arrangements for their purchases from small and medium agricultural producers;
• There is a need to check whether greater access to financial intermediation can assist small and medium producers overcome finance-related barriers to entry;
• Efficient financial intermediation can:
  • Assist the farm-households income generation and risk management;
  • Contribute to their welfare and the creation of wealth in poor communities.

The paper examines the purchase arrangements and contractual relationships of ‘Hortifruti, an institutional supplier of a multinational supermarket chain, and its influence on the development of small and medium producer creditworthiness in three Central American countries - Costa Rica, Nicaragua and Honduras.It finds that:

• The participation of small and medium agricultural producers in modern value chains improves their creditworthiness and their access to several types of financial services;
• Such access is an important factor in the willingness and ability of small and medium agricultural producers to enter a modern value chain or upgrade their capacity within the chain.