Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Monday, April 11, 2011

Challenges That Low Income People Face in Rural and Agriculture Livelihood Systems: Issues To Consider While Developing Value Chain Finance Interventions

Ramesh S Arunachalam
Rural Finance Practitioner

As noted in a companion post, value chain finance (VCF) is typically defined as flow of financing within a sub-sector, among various value chain stakeholders, for the specific purpose of getting product (s) to market (s). This is very different from the mere provision of conventional financing, where one of the chain stakeholders (for example, a specific firm/entity and often primary producers) gains access to financial services, independent of other stakeholders. We adopt the braoder definition here...

In this post, we look at constraints[i] that low income people face in agro and rural enterprises that need to be considered while developing value chain finance interventions:

·         Challenge # I:  Transport Cost to Bring Product to Markets: Many of these low income people live in remote rural areas or high population low-income urban areas, from where accessing markets is somewhat difficult. Generally, transport costs add a further element to pricing and they seriously limit the competitiveness of the product or service while hampering physical access to the market place and the opportunity to trade locally. Access to affordable and reliable transport is therefore very critical
·         Challenge # II: Lack of Access to Market Intelligence and Such Information: For many marginal producers, small scale vendors and rural enterprises, their trading is acknowledged only as part of the informal sector; consequently it is invisible, under-reported and un-recorded for the most part.  As a consequence, many of them are not registered and therefore have not declared themselves as economic entities and hence, are not recognized as users of market and such information. For example, as vendors or producers or rural enterprises for several years, they would have used their own innate intelligence to recognize trends, but these are un-recorded and part of an oral tradition that does not allow for any type of true and representative trend analysis. In the case of some produce, there are marketing information sources, but the producers are neither aware nor able to consult and use these. In this global economy that is increasingly not adequate.  Hence, access to disaggregated market categories and market information is very critical.
·         Challenge # III: Inability to Use Market Information in Production: Without data and information there is little opportunity for the small producers and/or rural enterprises to develop the market trend analysis skills. Further, the skill of using market intelligence information in product development and production planning is also not developed.  In addition, without the requisite baselines to create a database and maintain it, it is virtually impossible to generate analysis and trend statements to support business advisory services for these entrepreneurs. The key is therefore to strengthen producer registration and enterprise recording systems, while training producers in the use of marketing information in formal production planning. Facilitating the development of Business Development Services (BDS) providers is also critical.
·         Challenge # IV:  Product Cost and Quality: The limited market potential within a limited population generates limited sales that do not stimulate bulk purchasing.  Input costs are high and consequently the final product price is not always competitive.  Product quality also remains undependable and uncertain. Also, micro/small entrepreneurs and such rural enterprises generally use household grade equipment, implements and utensils in production.  Experience indicates that the production environment limits the ability to scale up production to commercial quantities. As a result, customers are forced to find suppliers of better quality.  The sole trader or small rural enterprise is faced with a double dilemma often – production is a time consuming operation and she/he has little time for marketing. The demands for quality assurance and the emergence of more competitive producers has also eroded these markets. Local purchasers as well as those involved in preparing produce for export have complained of inconsistent supplies of the albeit high quality produce (especially, rural handicrafts), difficulty to contact the supplier, and inadequate returns policies by the suppliers.  Suppliers complain of their inability to provide credit to their purchasers. Therefore, developing a local quality assurance certification system which linked with strengthened producer registration/enterprise recording systems and improved capability to use of marketing information in formal production planning and the use of Business Development Services (BDS) for operations should help producers/rural enterprises improve product quality and service provision.
·         Challenge # V: Capital for Cost Effective Production Operations: Many of the small and micro entrepreneurs have limited access to finance and mostly from either MFIs, SHGs, cooperatives or informal sector financiers. Banks are a rarity. The limitation of traditional micro-credit in supporting livelihood and productions systems of low income people are well known and need no further emphasis. The alternative is to go to banks but most of these enterprises lack collateral to access the capital for improvements that enhance access to better market linkages and/or improve production.  The credit application process is intimidating.  Because of poor production and market records, some have little basis for completing the credit application process, and are not able to corroborate details about the business. Lack of literacy is another aspect in this situation.  Thus, micro and such rural enterprises lack confidence in a credit system that tends not to favour the small-scale producer.  Their operations are considered high risk.  As they are credit shy, they have no credit rating as well.  The key would be to develop financial services that are responsive to the peculiarities of their production and livelihood systems – the formal or alternative financial sector need to be incentivised to serve small producers and rural enterprises for their livelihoods. Providing mere consumption loans as in micro-finance is insufficient.
·         Challenge # VI:  Inputs for Production: Inputs are increasingly costly and their availability is also not stable and this is another aspect that affects small producers and such rural enterprises. There are huge imperfections in the input markets
·         Challenge # VII:  Prevalence of Undesirable Marketing Practices: There are some undesirable marketing practices among small producers and these are:
Ø      Inconsistent supply and quality within a given period;
Ø      Lower quality produce being offered at prices equivalent to higher quality produce;
Ø      Poor handling and packaging of produce; 
Ø      Limited variety of produce offered;
Ø      In-adequate information on projected supplies available to the purchaser; and 
Ø      Lack of appreciation of and adherence to the purchasing and delivery norms.

The above challenges - in the daily livelihood situations and production of low income people engaged in agriculture and rural enterprises - if not comprehensively addressed, will render any value chain finance intervention sub-optimal in terms of utility and impact. In fact, these challenges are a source of opportunity for Value Chain Finance (VCF) interventions as well in terms of the kind of initiatives to support…in the respective chains...

Have A Nice Day!

[i] Compiled from various resources and also personal experiences. The resources are far too many to acknowledge here…but I am grateful to all of them...

No comments:

Post a Comment