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Making Risk-Sharing Models Work with Farmers, Agribusinesses, and Financial Institutions Image

Promoting Inclusive Markets and Financial Systems

Making Risk-Sharing Models Work with Farmers, Agribusinesses, and Financial Institutions

Making Risk-Sharing Models Work with Farmers, Agribusinesses, and Financial Institutions

Summary

The reality is that financial relationships exist among farmers and agribusinesses in the value chain. They are important to study in order to expand rural financial services. This paper examined four models that were pilot-tested by International Development Enterprises (India), Financiera EL Comercio (Paraguay), and Caja Nor Peru (Peru) and how they went from analyzing the existing financial relationships found in different value chains and contexts to developing innovative risk-sharing models that can be replicated by their own institutions and by others to expand rural financial services.

This report presents findings from the 18-month SEEP Network Practitioner Learning Program in “Strategic Alliances for Financial Services and Market Linkages in Rural Areas.” The action research presented here identified practical ways that financial institutions, practitioners supporting value chain development, and agribusinesses in the value chain and farmers can come together to reduce the risks and costs of lending to small farmers and capitalize on the benefits.

The following are the main findings of this research on developing risk-sharing models:

  • Analyzing and mapping value chains are a critical first step to forming risk-sharing models.
  • Developing the profile of each potential partner of the risk-sharing model is important for both financial institutions and market facilitators when selecting partners for risk-sharing models.
  • Gaining commitment from all stakeholders and structuring all the operational details and contingencies is vitally important in the beginning and may require investment of time and resources.
  • Dynamic and organized value chains offer more possibilities for forming risk-sharing models with agribusinesses in the value chain, but they are not required.
  • Pilot tests are necessary before replication is attempted.
  • Market facilitators can be catalysts for linking farmers to formal financial sources.
The research partners identified the following areas for further research and investment:
  • Developing a value chain analysis tool for financial institutions that is cost-effective and that examines the existing financial relationships between farmers and agribusinesses
  • Validating a decision-making matrix and tool kit for financial institutions and market facilitators
  • Studying risk-sharing arrangements in weaker, fragmented value chains
  • Measuring the cost-effectiveness and impact of alternative delivery channels on financial institutions and farmers
  • Further examination of the role of market facilitators in expanding rural financial services.
The PLP action research methodology helped the research partners capture the process of forming risk-sharing models and provided a platform to discuss common challenges and potential solutions during the implementation process. It is hoped that the results of this action research will be useful to financial institutions and practitioners, and that it will motivate them to open dialogues with new actors and explore more risk-sharing models, with the ultimate goal of expanding access to finance and enabling farmers to avail of improved market opportunities.

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