Closing the gap: Reaching the missing middle and rural poor through value chain finance

01.10.2008
Recent gains in microfinance have yet to reach the majority of the rural poor in developing countries. Additionally, a market gap exists for small and medium enterprises (SMEs) caught between microfinance and corporate banking. Standard banking practices for analysing risk and requirements for fixed asset collateral are critical barriers in reaching these markets. However, value chain finance – either from actors within the value chain itself or from external financial institutions – offers alternatives to these restrictive practices. This article focuses on external financial institutions operating in Africa and Latin America that are using innovative approaches to value chain finance to serve both small-scale rural producers and the SMEs that link them to urban and export markets. These unconventional methods for assessing risk and evaluating collateral present promising models for extending basic financial services to SMEs in the missing middle and to the rural poor. They also highlight opportunities for local financial institutions to enter profitable new markets and bring value chain finance models to scale, but doing so will require a change in traditional lending practices and, in some cases, policies regulating local banking industries.