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

01.10.2008
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.