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? The challenge therefore has been how to improve the competitiveness of value chains in which large numbers
of MSEs participate as well as benefits to MSEs
(increased employment and income, decreased risk, improved learning). One way
of doing this is by linking large numbers of small firms into value chains with potential for growth while fostering
inter-firm relationships & access to resources to enable small firms to
compete?
Smallholder
farmers are the world’s largest group of working-age poor and the
centerpiece of a “pro-poor” agricultural growth agenda. Much of
the world’s food supply will continue to depend on their efforts, yet a lack of
financial services often stymies their attempts to make productivity-enhancing
investments and to smooth their consumption between periods of plenty and
scarcity. Capital-constrained farmers minimize risk instead of maximizing
returns (for example, by investing in high-quality seed and fertilizer or
growing what is most profitable) (Trivelli and Venero 2007).
Agricultural 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 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 the
agribusiness systems.
While agriculture, agribusiness and finance are evolving rapidly in some parts of the globe, in
others like
sub-Saharan Africa, there is
little change and whole communities merely subsist and become
less and less competitive.
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 will
be critical components.
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.
Value chain finance
holds many positive attributes. These include ease of access, flexibility, and
risk mitigation, all of which can lead to the increased competitiveness of the
sector. However, there are imminent challenges to institutionalize value chain
finance in developing economies, where formal financial institutions are still
struggling to develop business models to reach smallholder farmers in remote
locations and link these farmers to value chain counterparts. In addition,
value chain actors are faced with limited financial resources to cater for the
cash flow needs of other actors.
What we have seen in
Africa has been a case of always “throwing the baby away with the bath water”
by the financial institutions because of lack of understanding of how the
agriculture value chain works. This calls for massive capacity building across
the continent to enable these financial institutions play their role.
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. 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.
MAJOR CHALLENGES OF SMES IN AFRICA
Small and Medium Enterprises (SMEs) are
often confronted with problems that is uncommon to the larger companies and
multi-national corporations. These problems include the following:
·
Access
to finance had been singled out as one of the major challenge impeding the
survival and growth of start-up SMEs in Africa. Significantly low figures of
start-up SMEs who apply for financing succeed in getting financing. Quite a
significant number of entrepreneurs are of the opinion that, although there
seems to be sufficient funds available it remains difficult to access these
funds, especially for start-up SMEs.
·
The
ability of SMEs to grow depends highly on their potential to invest in
restructuring and innovation. All these investments require capital and
therefore access to finance. Against this background, the consistently repeated
conception of SMEs about their problems regarding access to finance is a
priority area of concern, which if not properly addressed, can endanger the
survival and growth of the SMEs sector.
·
Lack
of adequate credit for SMEs traceable to the reluctance of banks to extend
credit to them owing among others to poor documentation of project proposals as
well as inadequate collateral by SME operators. Weak demand for products
arising from low and dwindling consumer purchasing power and lack of patronage
of locally produced goods by those in authority.
·
Incidence
of multiplicity of regulatory agencies and taxes which has always resulted in
high cost of doing business and poor management practices, and low
entrepreneurial skill arising from inadequate educational and technical
background of many SME promoters.
·
Developmental
policies weigh in favour of large firms and sometimes foreign –owned firms
leaving SMEs in a distressed and vulnerable position.
·
The
problem of access to information may be attributed to the inadequacy of SME
support institutions. This point to the need for a supportive policy to
encourage the establishment of documentation centers and information networks
to provide information to SMEs at an affordable price.
·
Regulatory
compliance which ordinarily reduces the cost of doing business for the private
sector and incurs costs- time and money, adverse effects on small firms.
·
Corruption,
lack of transparency, very high bureaucratic costs but most damagingly, a
seeming lack of government interest in & support for the roles of SMEs in
national economic development and competitiveness.
·
The
most worrying of all among these challenges is funding. Most new small business
enterprises are not attractive prospects for banks as they want to minimize
their risk profile.
·
Poor or Missing Infrastructure: African agriculture generally suffers from major
competitiveness constraints due to poor or missing infrastructure. This
includes road and rail transport, storage facilities, irrigation schemes, and
access to power and telecommunications. It is not just producers which are
affected of course, but also agribusiness. The extra cost, waste and delay
incurred by constant power interruptions and transport delays fundamentally
diminish domestic competitiveness.
·
Clearly, an agricultural
strategy should identify these gaps, but public finances are often stretched to
make the required investments. In addition, the public sector sometimes lacks
the technical and project management skills required to effectively deliver
projects. In this case, governments should be looking at approaches to the
mobilization of private sector finance (and expertise) for infrastructure
development, particularly through a PPP approach. This is as true for
agriculture as it is for any other sector. It is notable, as has been mentioned
earlier, that the transformation in agriculture in markets in East Asia
(particularly China) has been led by an emphasis on public spending in rural
areas.
·
Banks
perceive agricultural risks to be high and profits to be low, and lack
technical expertise in agriculture and specific crops. Therefore, a fundamental
bottleneck is the inability of financial institutions to adequately
conceptualize, underwrite, mitigate, and manage agricultural risks. At the same
time, agricultural SMEs lack basic business and financial management skills,
and poor financial literacy rates and a limited understanding of traditional
banking requirements pose a challenge to accessing formal finance.
EVOLUTION OF 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.
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[1].
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).
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