Abstract
Value chain finance (VCF) represents the aligning and structuring of finance within a value chain or as a result of its existence. Given the growing need to explore innovative approaches to rural and agricultural finance in Nigeria, such financing solutions have become imperative. However, few studies on the ex-ante impact of financing innovations exist. Therefore, to ascertain the benefits derivable from VCF, this paper analyzes the potential impact of VCF on plantain production in Nigeria. The expected benefits are estimated based on the economic surplus model, using the Dynamic Research Evaluation for Management (DREAM) software. Results from a 25-year simulation period at a 15% discount rate and an innovation cost of USD 1,300,000, show that, in the least optimistic scenario, the economy is expected to have an overall net gain (economic surplus) of USD 3256,800, with a net present value of USD 3406,880, benefit–cost ratio of 3.83, and an internal rate of return or break-even discount rate of 36.80%. These results indicate the positive impact of VCF, measured in terms of net present value and net benefit, expressed as producer and consumer surplus. This suggests VCF is a viable and beneficial financing innovation for food production in Nigeria. Finally, it is recommended that a value chain financing agency be established to make finance available to farmers to boost food production in Nigeria.
Highlights
Smallholder farmers face several challenges in increasing productivity
Investment in Value chain finance (VCF) started yielding benefits in the third year with benefits equaling the cost of investment in the ninth year and a total economic surplus of USD 2,173,900 at the end of the 25-year simulation period
There was a positive relationship between the effectiveness of VCF, measured in terms of net present value (NPV), and net benefit, expressed as producer and consumer surplus
Summary
Access to requisite financing has been noted to be a critical challenge in many developing countries (Anang, Sipiläinen, Bäckman and Kola, 2015). Bridging the financing gap of these farmers must become a priority. Where this is absent, farmers often rely on informal instruments, which are accessible and flexible they are inefficient and costly in the short term and do not always offer the support needed to help transform subsistence farming into a profitable business (Okonjo-Iweala and Madan, 2016). There is the need to urgently explore innovative approaches to rural and agricultural finance (IFPRI, 2010)
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