Analyzing and Financing Value Chains: Cutting Edge Developments in Value Chain Analysis

This paper highlights key features of value chain analysis and suggests how it can help identify interventions to improve financial services outreach to farmers and rural communities. The paper develops a framework that compares value chain financing in Peru and Uganda and finds that:

• Both formal and informal finance face challenges of side-selling and disregard for contracts;
• Larger farmers are more likely to benefit from improved access to technical information, production inputs and market;
• Traders, processors and other intermediaries want to reduce transaction costs by dealing with a small number of large suppliers;
• Financial institutions need to build capacity to serve large numbers of rural clients. 

Such information is useful in reducing the knowledge gap of lenders who associate all agricultural finance with high risk. Finally, value chain analysis focuses attention on where financial interventions may have the highest payoff. Financial institutions need to follow this up with more detailed analysis required to design products, develop lending capacity, and generate diversified loan portfolios.