Expert opinion

Agricultural Value Chain Finance

Agricultural Value Chain Finance (AVCF).  The perceptions of serious lending risks and high cost of servicer delivery, among other limitations, are well known barriers to the financing in agricultural value chains.  These barriers make it difficult to sometimes impossible for various value chain actors to get a loan, therefore denying them a chance to grow their businesses and incomes.  Clearly, traditional banking does not meet the needs of SME agribusiness enterprises.  Experience suggest that AVCF is arguably one of the most sustainable and effective ways of reaching producers downstream in a value chain with the potential to benefit a significantly greater proportion of clients.  Understanding the structure, relationships, and drivers of an agriculture value chain can shed light on opportunities for a bank to profitably penetrate or expand its presence in specific market segments.

In contrast to conventional direct lending to individual participants in a value chain, AVCF is characterized by a comprehensive assessment and understanding of the entire chain and the use of specially tailored financial products that meet the needs of the chain.  Rather than a simple credit risk assessment of the borrower, AVCF require an assessment of a broader risk of the value chain.  Agricultural Value Chain Finance often prioritizes bringing together individual producers and their productive capacity via producer associations, cooperatives, and other forms of collective enterprise, thereby greatly improving their access to markets of diversifying and transferring risk.[i]   It also leads to economies of scale in market transactions and greater bargaining power to form more reliable and profitable relationships with other market participants.  By focusing on AVCF, banks can develop a long-term strategy for growth in lending to other market segments and increase adoption of banking services.  Cost and risks can be managed, reduced through AVCF, offering a means of deeper penetration into markets that can otherwise be missed because of bank administrative cost and gaps in capacity.

Why should the value chain matter to bankers?

  • It is important to recognize some keyways in which value chain analysis differs from examinations of traditional commodity systems or industries
  • It focuses on net value added
  • It recognizes that linkages between activities and participants vary according to the product, even if the participants are the same
  • It recognizes that there are different kinds of value chains depending on their ‘drivers’ and associated governance relationships; and
  • It looks beyond physical flows to include informational flows

The primary focus is to promote lending to participants within a value chain, working capital loans, capital asset development including improvements and productive equipment purchases (including leasing).

AVCF requires an understanding and sector knowledge, looking at cash flows among participants, the dynamics and long-term commitment along with a clear strategy.  AVCF is a client driven approach “How can we structure finance to address client needs and risks”.  AVCF can reduce costs and risks and it offers a way to achieve access to new clients otherwise excluded from formal financial services.  While AVCF may provide access to finance for farmers, traders and processors, its value is in understanding the relationship between participants in the chain and how they share risks and benefits.

Banks and other financial services providers can recognize the nature of the value chain relationship, transactions, and risks.  This information can be used to offer services that are less risky and costly and be more inclusive.  A well-functioning value chain provides all actors, including financial service providers, access to information on the current and future trends of the markets.

The irregularity of agricultural cash flows calls for distinct products terms and risk management strategies.  Knowing your client (KYC) involves up-front market research to inform product design, but also ongoing attention to client feedback and a commitment to be a learning organization and to adapting products.

Capacity building is essential to provide the necessary skill transfer to financial institutions in order to better understand the agriculture sector, analyze risks, develop appropriate lending products, and find cost-effective distribution channels to reach clients, including skills to forge value chain partnerships.

Example Models of Agricultural Value Chain Financing:

Model #1

Bank’s full engagement with a processor/aggregator.  Bulk loan to an anchor company who then lends to producers/suppliers in their supply chain.  Producers sell raw material to the anchor company with proceeds from sales, minus loan payments, deposited into a producer’s bank account.

  1. Anchor Company and producers enter into contract
  2. Contracts are shared with the partnering financial institution (Bank)
  3. A bulk loan is made to the Anchor Company who will manage the loan
  4. The Anchor Company offers financing, on-lending to producers in the supply chain
  5. Production is sold to the Anchor Company
  6. The Anchor Company makes payments into Producer accounts with the partnering bank minus agreed upon finance payments
  7. The residual funds are available to the producer in their bank accounts

In additional usually technical assistance is needed at the beginning to support both the Anchor Company and producers in the supply chain.

Model #2

A Bank partial engagement with the Anchor Company.  Partnering bank issues loans directly to the producers in the value chain based upon Anchor Company contracts and due diligence.  Proceeds from sale of goods to Anchor company are deposited into Producer bank accounts.

  1. Anchor Company and producers enter into contract
  2. Contracts are shared with the partnering financial institution (Bank) referrals
  3. Using the Anchor Company contracts with the producers as collateral (Moveable asset) and referral, due diligence, the Bank issues a loan to the producer
  4. The Producer delivers goods as per the contract
  5. Proceeds from the sales of goods are deposited into the Producer’s bank account. The Bank and Producer agree upon the loan payment amount and the residual is available to the Producer

Additional Bank services are available to producer, ex: savings, transaction accounts other credit products



  • Increased access to finance
  • Loan payments made with delivery of production to Anchor Company
  • Enables growth in assets and income
  • Alternative collateral, “Moveable asset” contract with Anchor Company
  • Improved relationship with Anchor Company
  • Training integrated to upskill producer
  • Flexible finance terms, interest rates more competitive


  • Formal supply contract with Anchor Company
  • Formalize business transactions, payments through a bank account
  • Increased monitoring and transparency

Anchor Company:


  • AVCF is expected to boost production volumes, stronger supply chain
  • Quality controls added
  • Loans structured to smooth out seasonality issues and boost production
  • The facility will strengthen relationships and loyalty
  • Training integrated to upskill producer


  • Sign an agreement with the bank, may include Risk Underwrite
  • Enter into formal agreement with the producer
  • Make recommendations (due diligence) on suitable producers for financing
  • Assist control of loan disbursements and ongoing monitoring of performance
  • Agree to make payments on delivery thru bank account
  • Provide technical support, training to producer



  • The agreement with Anchor Company and risk underwrite enable a much wider range of finance applicants
  • The Bank has a greatly improved information flow on the borrower with effectively monitoring thru sales
  • Uses crops and supply relationships as collateral “Moveable assets”
  • Improved relationships with the Anchor Company
  • Increase new bank accounts numbers and opportunities to cross sell services


  • Sign agreement with Anchor Company
  • Process loan applications in partnership with the Anchor Company
  • Document loans and manage loan pay-outs
  • Establish bank accounts for applicants
  • Manage loans and liaise with the Anchor Co.

Agricultural Financing models can greatly improve relationships in the Value Chain increase productivity, effectively manage risk and increase access to finance for participants in the chain.