Value chain governance and access to finance: Maize, sugar cane and sunflower oil in Uganda

Catherine Johnston; Richard Meyer

doi:10.3362/1755-1986.2008.026

Value chain governance and access to finance: Maize, sugar cane and sunflower oil in Uganda

While financial institutions have had relatively little success in overcoming the risks and costs of lending to agriculture, rising food prices and shortages have made it imperative to find better ways of increasing financial flows in support of increased agricultural production and marketing. Direct value chain finance transactions operate with the same logic as any other financial transaction. The lender must engage in some form of client screening, client monitoring and contract enforcement. To successfully accomplish these tasks, direct value chain lenders can use information gained through their value chain relationships about their clients and their clients’ businesses. The value chain governance structure influences how easily and successfully a value chain lender can accomplish these tasks. Value chain governance structures can be defined with a typology along a continuum of four types of relationships described generically as market based, balanced, directed and hierarchical. A market-based value chain provides little opportunity for a lender to screen or monitor clients or the conditions needed to enforce contracts. A balanced value chain has incentives for firms to share information, jointly ensure product targets are met and respect contracts that reflect interdependencies. A directed value chain provides the lead firm with access to information, control over supplier production and the power to enforce contracts. Therefore, we expect to see more examples of successful direct value chain financing in value chains with a directed governance structure, but fewer examples in value chains with a market governance structure.

Campion, A. (2006) ‘Financing artichokes and citrus: A study of value chain fi- nance in Peru’, MicoReport No. 73, AMAP, USAID, Washington DC, December, www.microlinks.org/ev_en.php?ID=3739_201_1&ID2=DO_TOPIC www.microlinks.org/ev_en.php?ID=3739_201_1&ID2=DO_TOPIC

Fries, R. and Akin, M. (2004) ‘Value chains and their significance for addressing the rural finance challenge’, MicroReport No. 20, AMAP, USAID, Washington DC, December, www.microfinancegateway.org/content/article/detail/32556 www.microfinancegateway.org/content/article/detail/32556

Gereffi, G., Humphrey, J. and Sturgeon, T. (2005) ‘The governance of global value chains’, Review of International Political Economy 12 (1): 78-104.

González-Vega, C., Chalmers, G., Quiros, R. and Rodríguez-Meza, J. (2007) ‘Value chains and financial intermediation: Some theory and a case study about creditworthiness, supermarkets and small producers in Central America’, presented at the International Conference on Rural Finance Research: Moving Results into Policies and Practice, FAO, Rome, March 19-21, www.microfinancegateway.org/content/article/detail/43211 www.microfinancegateway.org/content/article/detail/43211

Johnston, C. and Meyer, R. L. (2007) ‘Value chain governance and access to finance: Maize, sugar cane and sunflower oil in Uganda’, MicroReport No. 88, AMAP, USAID, Washington DC, December, www.microlinks.org/ev_en.php?ID=9893_201&ID2=DO_TOPIC www.microlinks.org/ev_en.php?ID=9893_201&ID2=DO_TOPIC

Kaplinsky, R. and Morris, M. (2001) A Handbook for Value Chain Research, IRDC, http://asiandrivers.open.ac.uk/Resources.html http://asiandrivers.open.ac.uk/Resources.html

Miller, C. and Da Silva, C. (2007) ‘Value chain financing in agriculture’, Enterprise Development & Microfinance 18 (2/3): 95-108.

Ruotsi, J. (2003) ‘Agricultural marketing companies as sources of smallholder credit in eastern and southern Africa: Experiences, insights and potential donor role’, IFAD, Rome, www.ruralfinance.org/servlet/CDSServlet?status=ND0xODEzLjE5MzY0JjY9ZW4mMzM9ZG9jdW1lbnRzJjM3PWluZm8~#koinfo www.ruralfinance.org/servlet/CDSServlet?status=ND0xODEzLjE5MzY0JjY9ZW4mMzM9ZG9jdW1lbnRzJjM3PWluZm8~#koinfo

Shepherd, A. W. (2004) Financing Agricultural Marketing: The Asian Experience, AGSF Occasional Paper 2, FAO, Rome, www.fao.org/ag/ags/subjects/en/agmarket/markfinance.html www.fao.org/ag/ags/subjects/en/agmarket/markfinance.html

USAID (2005) ‘Value chain finance’, RAFI Notes 2, USAID, Washington DC, June. www.microfinancegateway.org/content/article/detail/31159 www.microfinancegateway.org/content/article/detail/31159

Wenner, M., Navajas, S., Trivelli, C. and Tarazona, A. (2007) ‘Managing credit risk in rural financial institutions: What seems to work’, Enterprise Development & Microfinance 18 (2/3): 158-174.