Finance

One of the key barriers sited around the world for the growth of small businesses and agri industries is the restrictions the entrepreneurs have in accessing finance. With the establishement of SEFEC, SANASA has been able to enable the individual entrepreneurs to follow a guided path to access financing for their ventures.

Entrepreneur financing facilitated by SEFEC is two folds. First one is value chain financing method, where the entire value chain is diagnosed to assess the funding gaps. This enables financiers to understand the bottlenecks as well as opportunities. The second is supporting micro financing organizations to upgrade their products and services to serve SME sector with a proper risk assessment in a value chain oriented scope.

Sefec advice, train, and provide informations to financiers to assess a business in a value chain. Sefec team supports conducting finance requirement analysis, and feasibility studies for financing value chains. These tools were developed with the involvement of the development finance team of SANASA Development Bank, and the SANASA cooperatives, with the value addition of consultants from Desjardins movement.

Agricultural Value Chain Finance (AVCF) in Sri Lanka

Over the past decade, the AVC methodology has been introduced as one of the most innovative methods for financing Micro, Small and Medium scale Enterprises (MSMEs).

In Sri Lanka, the AVCF methodology is yet a new concept for lending institutions . In conventional lending, banks grant loans to individual borrowers simply on the credit risk assessment of the respective borrower. However, in AVCF methodology, banks are required to make broad assessments of the entire value chain, including all the actors in that value chain, their financial needs, the relationships among them and their contributions to the value chain. This provides financial institutions a comprehensive understanding of the market challenges and opportunities, in addition to the financial capabilities of the individual actors.

While Sri Lankan expansion rates for the formal financial services sector is high in comparison to other countries in the South Asian region, in practice, access to financing, particularly for small holder farmers and primary producers, is not always guaranteed. Formal financial institutions are reluctant to provide financing to small farmers or primary producers not only due to the high cost of operations, but also due to the low return on investment against high risks involved.

In any Agricultural Value Chain (AVC ), Primary producers or small holder farmers play an important role as they are involved in the production process of crops from the very beginning. They need financing to meet their cultivation and production costs, particularly when they need to invest in technology, adopt best agricultural practices to increase production and improve the quality. However, the primary producers as well as other actors whose criteria better qualify for financing, find it a challenge to secure funds from formal financial institutions. This is chiefly because conventional financial products have not been customized to address the needs of AVCs adequately and the eco systems that can build capabilities and confidence of financial institutions , such as business intelligence, policies that promote commercial approach towards agro production, collateral requirements that are bound with many other legal issues such as land entitlements etc, are yet to be properly established or sorted.

The AVC Methodology

Agricultural value chain finance is inclusive for all financial services, products and support services that are flowing through a value chain in order to address the needs and the constraints in that chain. AVCF ensures the availability of financial services for all value chain actors to enhance their access to finance, to secure sales, to procure products, to reduce risks, and to improve efficiency within the chain.

The following table depicts value chain actors and their financial requirements:

Once all independent chain actors in a value chain are linked together to establish an Agricultural Value Chain, lending institutions are able to assess the viability and feasibility of the economic activities undertaken by each actor in an established network. The relationship among the chain actors provides additional security for the lender to mitigate risk.
Under our value chain initiative, four value chains are strengthened through financing and non financial services. Other than the tourism value chain other three value chains are in agriculture sector, hence AVF is the key methodology promoted to finance the stakeholders, The three value chains are, pepper, traditional rice and banana.

Once the value chains are being diagnosed and the networking is strengthened, Sanasa Development Bank (SDB) and Sanasa Primary Societies collaboratively assess the financial needs. EFFEC project supported SANASA federation to develop special loan products and diagnostic tools to support the AVF process. The special loan products are developed specifically for actors in the Agricultural Value Chains. These products are currently powered by the financing of SDB.

The Special Loan Products for Agricultural Value Chains

1. “Pepper Working Capital Loan”
   The explanatory name for this product is “Agricultural Value Chain based loan product for working capital for maintenance of pepper cultivation”. The purpose of this loan product is to assist pepper growers to secure better incomes by adopting best agricultural practices and improving the quality of pepper to a quality level that meets international quality standards for pepper.
2. “Traditional Paddy Working Capital Loan”
   This product is named “Agricultural Value Chain based loan product for working capital for Traditional Paddy Cultivation” and in short form the product is known as “Traditional Paddy Working Capital Loan”.
   The purpose of this loan product is to assist traditional paddy growers to secure higher incomes by adopting recommended organic agricultural best practices and improving the quality and quantity of their yield to meet market demand and international quality standards.
3. “Investment loan for Paddy”
   This product is named as “Investment Capital for Traditional Paddy related MSMEs”. The short name of the product is “Investment loan for Paddy”.The purpose of this loan product is to assist the farmer members to secure a better income by adopting recommended agricultural best practices with micro irrigation systems, lift irrigation, open dug wells and utilisation of agricultural machineries and equipment in cultivation. Further, under this product, loans are available for improving the quality of produce by using post- harvest technology at the farm level. Other actors in the rice value chain are also eligible to obtain loans for compost making, seed paddy production, selling inputs, purchasing paddy stocks, warehousing, milling and producing rice and rice-based products etc.
4. “SDB Pepper Value Chain Supplier Loan Scheme”.
   The purpose of this loan product is to assist pepper growers to secure better incomes by adopting agricultural best practices and improving the quality of pepper that meets with international standards. This loan is for financing target customers, mechanical needs at each stage, input suppliers, primary producers, collectors/ traders, processors, and exporters.