Closing the Gap: Reaching the Missing Middle and Rural Poor through Value Chain Finance
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 small and medium enterprises (SMEs) that link them to urban and export markets. These 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. The article offers insights into opportunities and challenges for applying value chain finance on a larger scale in both domestic and export markets. Findings include:
- Lenders must be willing to shift their approach to risk assessment and collateral;
- Value chains can facilitate traditional forms of lending, but greater opportunities lie in replacing fixed asset collateral with a claim on future sales;
- Value chain finance requires transparency and open communication on all sides.
The article focuses on innovations in value chain finance facilitated by non-profit development organizations with social objectives. Competitive pricing and high repayment rates suggest that there are profitable opportunities for commercial financial institutions as well.