Financing Agricultural Value Chains in Central America

Jun 2010
Agricultural value chain financing (VCF) is an emerging phenomenon in the region but it is not well studied. Historically, small- and medium-sized famers experience problems accessing formal finance. Participation in a well-structured and dynamic supply chain seems to improve chances of obtaining financing, either directly from larger more liquid agents in the same chain or indirectly from external formal lenders based on the type of relationships and degrees of connectedness in the chain (advance sale contracts, technical assistance agreements, length of transaction history, etc.). Four value chains were studied in Nicaragua (diary and plantains) and Honduras (plantains and horticulture, sweet peppers and tomatoes specifically) to discover how and under what terms and conditions financing was being provided and to understand the challenges in expanding the use of this type of financing. The main findings are (i) VCF is occurring in Nicaragua and Honduras, but it is mostly indirect; (ii) the specific instruments used to support VCF are simple¿lead firm vouching for and even providing guarantees for smaller actors, relying on donor financed guarantee funds, and buyer/exporter finance; (iii) creditor rights are weak in both countries; (iv) financial institutions that are participating in VCF are not lowering interest rates despite fewer risks faced; (v) the legacy of inappropriate government interventions, namely debt forgiveness programs, and generally weak support services for producers dampens the enthusiasm of formal financial intermediaries to expand agricultural lending; and (vi) high quality technical assistance is serving as an accelerant and facilitating VCF, but it is donor financed and it is important to find ways to sustain this intervention over time.