THE CHALLENGES OF FINANCING SMALL FARMERS AND MSMES IN AFRICA: HOW AGRICULTURAL VALUE CHAIN FINANCE CAN BE A RESCUE.
INTRODUCTION
WHAT IS VALUE CHAIN?
A value chain is often defined as sequence of value-adding activities in a supply chain – from production to consumption, through processing and commercialization. Value chains in agriculture can be thought of as a set of processes and flows – from the inputs to production to processing, marketing and the consumer. Each segment of a chain has one or more backward and forward linkages. A chain is only as strong as its weakest link and hence the stronger the links, the more secure is the flow of products and services within chain. It is important to note that the benefit of value chain finance goes beyond that of the financial flows within the chain. Yes, it is about finance with agriculture and agribusiness within a chain but also about aligning and structuring finance with the chain or because of it. Simply being a part of a secure market chain makes one a better credit risk.

WHAT IS “FINANCING ALONG THE VALUE CHAIN?”
For centuries traders have provided finance to farmers for harvest, inputs or other needs such as emergencies. Many of the traders in turn receive finance from millers and processors who in turn may be financed from wholesalers or exporters who are farther “up” the chain from production to marketing. We all understand how trade finance typically works. But we also want to note that there are many entry points and many factors involved.

EXECUTIVE SUMMARY
The term “value chain” therefore describes the full range of activities that are required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use .

While approaches and applications vary, most value chain approaches have several common characteristics, including: a market system perspective; a focus on end markets; an emphasis on value chain governance; a recognition of the importance of relationships; a focus on changing firms’ behavior and transforming value chain relationships; targeting leverage points; and, empowering the private sector. In the international development field, projects utilizing the value chain approach generally tend to shift the balance of power within value chains through the formation of associations; branding; alternative financing; support for market systems; market or supply diversification; and, changing the basis of competition (generally from price-based to quality-based).

COMPETITIVENESS
One major discussion across Africa since globalization has been; can small firms and farmers compete in international, national or even local (globalized) markets? Will the poor be marginalized more by globalization? Or can they learn to compete? Africa has a large and growing population, and an increasingly industrialized and urbanized economy. All people need access to reliable, cost-effective and diversified sources of high-quality food, and the best source of this food is from the region itself.

There is also the vast export potential to be considered, especially in Middle Eastern and Asian markets, where food consumption is rising rapidly. However, African agriculture continues to be relatively uncompetitive, especially in relation to developing counterparts in Asia and Latin America. The continent’s over reliance on food imports creates unnecessary trade imbalances, fosters anxiety over food security, and is also a missed opportunity for promoting prosperity.

There is a serious danger that, through its inability to structurally reform agriculture, Africa is forced to make ever greater concessions to powerful foreign interests to guarantee food security. Whilst foreign investment should be encouraged, it should not be negotiated in desperation but from a position of confidence.

INADEQUATE FINANCING
A healthier development would be the orderly financing of a competitive domestic agricultural sector underpinned by a robust local financial sector; and there are reasons for optimism. In general, Africa’s financial sector is deepening and improving rapidly. Currently, however, agriculture is not broadly an attractive market for commercial financial institutions. Development agencies should build on the momentum in the financial sector however, to work more closely with financiers to facilitate access to finance for agriculture.

The agricultural sector is essential for job creation, food production and overall economic growth in many developing countries. Africa’s agricultural potential is largely untapped, however, with value chains often unproductive and uncompetitive. This is due to a number of environmental, economic, and social factors. One of the key challenges is lack of finance to fund the growth of African agriculture. It is against this backdrop that African governments, commercial financial institutions and the international community have reinforced their efforts to close this gap, also spurred on by the recent global food and financial crisis.

Agrifood systems worldwide are being transformed in unprecedented ways. Market integration and stringent specification of quality and timing of produce has never been so important. Farm production and distribution are rapidly evolving from the simple relationships and points of interaction of the past to the highly integrated linkages and closer alignments among business partners we witness today. Value chains are being promoted as the business development frameworks of choice in the agrifood sector.

There is much more attention being paid to inter and intra-organizational efficiency in production, processing and logistics. There is increased focus on marketing, product differentiation and product niche development. Furthermore, the competition is now global: prices are less affected by local conditions, seasonality and markets. All these developments make a solid financing structure even more important than it has always been. Market competitiveness and market risks are becoming the drivers of financing decisions in the new agrifood systems.

Yes, much is changing and much is not. While African agriculture, agribusiness and finance is evolving rapidly in some parts of the globe, in others there is little change and whole communities merely subsist and become less and less competitive, often also stricken with HIV-AIDS. Many sub-Saharan countries are affected by this scenario. It is important that value chain opportunities be available to all but to do so, finance and capacity building are critical components.
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