The strategic alliances between big finance providers (banks, development agencies, donors, government agencies) and micro credit providers (NGO, micro lenders, micro finance organizations) are a new wave in the world financial market. The phenomenon can be studied from the angle of Value Chain Approach, which has been investigated and developed by USAID Micro Enterprise.

Value Chain Finance usually works vertically where at the top there is a provider who can’t sell a service, unless supporting and/or integrating it by an additional value; at the bottom there is an end user who can’t buy that service for various reasons ranging from high cost and credit worthless.

The rationale of value chain finance rely in the so-called asymmetric information, which is the most important obstacle to establish a relationship between lender and borrower, the first knowing very little about the latter who can’t meet the credit procedure’s requirements. Under the circumstances for the lender there is no choice but to collect information on the potential borrower, which is an impracticable avenue because it costs too much so that the service’s break-even point is so high to make it the service out of market. For the potential borrower, simply, there is no finance available to run a business.

In this context any intervention in the credit market should aim at finding out a meeting point, which can be achieved by building a bridge along with other actors, besides lender and borrower and in so doing adding value at each step and make it the service more appealing.

Let’s think a situation where a small entrepreneur leaves in an environment far away (conceptually and physically) from a traditional banker. Under the circumstances the banker who really want to expand its market may link with a local micro lender and in so doing be ready to share – under whatever modalities – the credit risk of a small entrepreneur.

The above linkage is made by the first two rings of a chain, which are necessary but not sufficient to assure a big risk; other actors shall be called in to join the lending scheme and most likely a ring could be a guarantor who under the vest of a fund manager or whatever institution that is available to share the risk. In this understanding the original risk has been shared in a way to have a marketable service.

However the chain isn’t yet working because it focuses on the behavior of borrower and lender, only. In an emerging economy a further type of intervention is very important, namely the provision of supporting services for backing and assisting the actors who are involved in each ring of the chain. This is an intervention of horizontal type made by non-financial providers who focus enterprise’s management, production and selling factors along with bank’s marketing services.

Again, an other ring is requested to face the problems connected with unfavorable market conditions. Indeed, when an entrepreneur goes to the market to sell the products, here the obstacles are so many and so interrelated to practically being an external cost that undermines any trading. This means that all efforts of lenders and borrowers shall be vanished in presence of unfavorable market conditions. This means also that in a credit contract there is a shadow third partner who has a very crucial role, namely the policy makers who have to make it happen a well-equipped financial market.

Eventually, the chain is completed by adding a ring with the intervention of an international development agency sponsoring the above-depicted scheme and actually backing the guarantor by providing either additional finance and/or sharing the risk.

Above is a picture of a standard chain; in our direct experience we proposed schemes where the chain has been shaped according to the institutional environment, the legislative framework, the market conditions and the behavior of the stakeholders involved in.

A final question could be: the chain finance is a costly tool? The answer is: Yes and Not. Yes, because each ring means an additional cost. No, because for the time being the scheme seems to be a suitable financial engineering to boost the real economy in the neglected regions, minimize unemployment and poverty, the bill being paid by the community.

Ascanio Graziosi