MODERN VALUE CHAINS

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MODERN VALUE CHAINS and FINANCIAL
INTERMEDIATION The construction of
creditworthiness Claudio Gonzalez-Vega The Ohio
State University International Conference
on Rural Finance Research FAO Rome, 20 March 2007
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Claudio Gonzalez-Vega Geoffrey Chalmers Rodolfo
Quiros Jorge Rodriguez-Meza Value Chains
and Financial Intermediation Some Theory
and a Case Study about Creditworthiness,
Supermarkets and Small Producers in Central
America Hortifruti in Central America
A Case Study about the Influence of
Supermarkets on the Development and
Evolution of Creditworthiness among Medium and
Small Agricultural Producers RAFI, USAID,
2006
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Claudio González-Vega Cadenas de valor
modernas Hacia la creación y el
fortalecimiento de sujetos de
crédito Financiamiento de las Cadenas
Agrícolas de Valor Rodolfo Quirós,
editor Academia de Centroamérica, FAO,
RUTA, Serfirural, 2007
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THREE QUESTIONS 1. To what extent existing
credit constraints and financial shallowness
in rural areas limit small and medium farmer
participation in modern value
chains? BARRIERS TO ENTRY
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THREE QUESTIONS 2. To what extent
participation in modern value chains
facilitates small and medium farmer access
to financial services? SMALL
FARMER ACCESS TO FINANCE
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THREE QUESTIONS 3. To what extent the
development of new contractual
relationships, around modern value chains,
promotes an expansion of outreach of
financial intermediaries? FINANCIAL
DEEPENING
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TWO PERSPECTIVES 1. TRADITIONAL Interlink
ed contracts facilitate credit
flows 2. NEW Contractual
relationships improve creditworthiness
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INTERLINKED CONTRACTS when the prices of two
products or services are determined
simultaneously and the agreement to buy or
sell one is conditioned upon the agreement
to buy or sell the other traders,
processors, exporters provide the bulk of
the credit used by small and medium
producers (Shepherd, FAO, 2004)
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INTERLINKED CONTRACTS reduce the production
and operational risks by linking credit to
the provision of technical advice or
timely delivery of appropriate inputs or
by building relationships with farmers or
linking credit to subsequent sales of
produce Credit is built into crop
purchase and input supply transactions
(Christen and Pearce, CGAP, 2005)
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NEW CHAIN-AS-TRIGGER PERSPECTIVE The
development of linkages (explicit or implicit
contracts) with a modern value chain (e.g.,
supermarket chain) triggers and
enhances creditworthiness with financial
intermediaries
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CREDITWORTHINESS Lenders problem ?
Information ? Incentives ? Contract
enforcement
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• CREDITWORTHINESS
• 1. CORE CREDITWORTHINESS
• ability to repay
• profitability
• risk
• f
• willingness to repay
• incentives

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CREDITWORTHINESS 2. RECOGNIZED
CREDITWORTHINESS f (lending
technology) screening
monitoring contract design
enforcement
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CREDITWORTHINESS 3. REVEALED CREDITWORTHINESS
f (signalling) reputation credit
history verifiable information
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• CREDITWORTHINESS
• The construction of creditworthiness
• is a joint investment
• Probability of success (core)
• Ability to identify (recognized)
• Ability to show (revealed)

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• NEW TYPES OF VALUE CHAINS
• Supermarkets
• Modern traditional
• Dynamic stagnant
• Quality standards
• Diversification single crop
• Year-long seasonal
• Relationships spot markets
• (Reardon)

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Contractual relationships ? Locus of complex
commitments ? Repeat transactions ? Reciprocal
investments Supermarket chain Search and
screen (asymmetric information)
Preferred supplier deals Technical
assistance
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Contractual relationships ? Locus of complex
commitments ? Repeat transactions ? Reciprocal
investments Small producer Innovation
Consumption smoothing Learning
Physical investments
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Participation in modern value chains ? Endowment
of skills, experience and specialized
factors (heterogeneous and not easily
observable) ? Willingness to take risks and
modern habits and attitudes ? Learning ?
imitation ? technical assistance ? Investme
nts
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Private information Preferred list
delegated screening Technical
services
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CREDITWORTHINESS 1. Risk containment ? Volume
? Guaranteed market ? Control of
production risk ?
Productivity ? Price ? Less variability (ba
nd)
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CREDITWORTHINESS 1. Risk containment ? Payment
? Certainty ? Shorter
lag ? Rejection ? Quality control ?
Consumption ? Whole year smoothing
liquidity (senior) ? Staggered
planting
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CREDITWORTHINESS 1. Risk containment ? Systemi
c ? Diversification shocks ? Demand
shifts ? Multi-product procurement
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CREDITWORTHINESS 2. Better productive
opportunity ? larger demand for financial
services ? ability to repay larger loans ?
greater willingness to repay
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TWO PERSPECTIVES TRADITIONAL NEW
? Contract includes loan ? Procurement
and (inter-linking) credit separate ?
Buyers power ? Producers power
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TWO PERSPECTIVES TRADITIONAL NEW
? Funds flow inside ? Funds added from the
chain outside ? Zero net flows ?
Positive flows (deficit sector)
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TWO PERSPECTIVES TRADITIONAL NEW
? Direct ? Indirect access to credit
access to financial services
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TWO HYPOTHESES TRADITIONAL NEW
? Supermaket chains ? Indirect provide
direct access to access to credit
financial services
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Dilemma
distance systemic risk
diversified potencial intermediary
clients
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Supermaket chain as an agent
SIGNALS
SCREENING superma
rket producer diversification

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EXPLORATION OF HYPOTHESES HORTIFRUTI Case
study Interviews Costa Rica buyers Nicaragua
sample of growers Honduras bankers and NGOs
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The case study has found no evidence that
Hortifruti plays or has played of lender to
its preferred producers in Central
America The case study uncovered sufficient
pieces of empirical evidence to support the
hypothesis that Hortifruti has enhanced the
creditworthiness of its preferred producers
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• VIRTUOUS CIRCLES
• Improved opportunities for small and medium
  farmers participating in value chains
• Increased chain competitiveness
• Increased financial deepening
• Rural development

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SINERGIES ALLIANCES
Financial intermediaries
Chain
Producer
Rural areas
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