INNOVATIVE SUPPLY CHAIN FINANCE

Jinchang LaiPrincipal Operations Officer, and Lead for Financial

Infrastructure, Finance and Markets, East Asia & Pacific Region

Ulaanbaatar, December 15, 2014

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Example of a Supply ChainRice Production

Source: World Bank Cambodia

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How do Lenders See a Supply Chain?

Length of the supply chain (value chain); value-added of each stageWho are the chain actors? How many? Their dependency on the chain performanceGovernance of the chain: strength of the chain leader; and allocation of risks and benefitsCompetitiveness of a chain -- efficiency, synergy, reliability and innovativeness -- and its positioning in the marketStrength of social capitalVulnerability to policy, regulatory and systemic risksCommitment to environmental, safety and social responsibilities

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Modern productions are mostly done through collaborations among supply chain playersThe movements of goods and services along supply chains result in changes in accounts receivable (AR) and inventoryThese (and the associated information) can be leveraged to make financing available for suppliers, processors, buyers and services providersThe presence of financing can strengthen social capital, increase the efficiency and competitiveness of a chainThe greater information efficiency, stronger incentives and the organized payment/settlement mechanisms reduce transaction cost

Linkages can be Powerful for Lenders

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Example of a Supply Chain Finance SystemPoultry Production

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Lending institutions want the information mechanism and incentive structure embedded in a chainThey want to leverage “other people’s existing networks” for the distribution of products and servicesAnd ... even better ... to make the clients “captive”Also ... to substantively shift risk exposure vis-a-vis small borrowers to the larger suppliers or buyersWhether or not an economy has an active supply chain (value chain) finance market depends on:

Enabling environment (Can lenders do it conveniently?) Equitable share of benefits and risks (What do they get out of it?

Do lenders get one or more benefits above?)

Why Supply Chain Finance?

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Supply chain finance is essentially a way of organizing accounts receivable and inventory finance (plus some equipment finance, e.g., lessors lease a specific brand of chain equipment with risk sharing and buy-back arrangements) – All in the space of movables financeWhile “movable asset finance” (movables finance) is a conceptual term, there are many business names and brand names for the various credits secured by movable assetsSupply chain finance is one of those business names

Why Supply Chain Finance?

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Who are Involved in Supply Chain Finance?

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Example of a Supply Chain Finance Advertisement

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Example of a Supply Chain Finance Suite (I)

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Example of a Supply Chain Finance Suite (II)

Rolled out by a bank with a brand name of “Win-Win Chain”, which contains seven products (as of 2013):

Future inventory financing: Lender controls borrower access to inventory; for procurement purpose

Inventory rights pledge loan: Based on WHR, Bill of Lading, etc. Inventory pledge loan: Secured by a changing pool of inventory Accounts receivable financing: Based on a pledge of AR or

factoring of AR Cross-border payments financing: Processing and financing in

one package Global confirmation financing: Combines with credit enhancement

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Stage I: Lending to the supply chain actors individually; occasionally, clients introduce their supplier or buyer to the lender as potential clientsStage II: Consciously leveraging expertize/relationship in and organizing clients along supply chains (value chains); systematically using chain information and incentives to evaluate, structure, deliver and manage exposuresStage III: Actively promote non-credit products and services; even use chain relationship to distribute other players’ products for a feeStage IV: Organize all actors in an Internet-based platform for optimal solution to each client; digitalization of information, services and financing

How Do Lenders Grow Up?

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Systemic risk; and the need for insuranceUneven pattern of cash flowsSuppliers, aggregators/buyers as well as the government are the major providers of credit, not just financial institutionsCore chain participants are mostly individuals/householdsLenders and/or chain leaders may need “conduits” to reach them; conduits can be associations, cooperatives, joint liability borrowing groups, 3rd party networks, etc.May not have formal security agreementsPayment and cash management mechanisms can help to tie in small clients

What is So Special aboutAgri Supply Chain Finance?

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A New Generation of Players

The rise of e-platforms: Digitization of ARs and WRs The visibility and transparency of value chains have increased

greatly with technology – creating a fresh incentive structure Entry of the payment services providers – e.g., in a good position to

provide “cash advance”

The extraordinary rise of e-commerce players: What are the Information and Incentive advantages that an e-

commerce player have in comparison to the traditional commercial banks?

What “Controls” and even “Possessions” that an e-commerce player has over a borrower or a collateral?

Example of a simplest product: A Finance Company lends against the receivables of suppliers with its parent company as the account debtor

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Example of an OnlineSupply Chain Finance System

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A New Generation of PlayersAn Illustrative Case

Group A is a major e-commerce player with two large online shopping platforms. Not long ago, it started a finance subsidiary to provide loans mainly to the MSME suppliers/sellers on its platforms. The loans are said to be all unsecured. By August 2014, about half a million MSMEs have been supported.

The payment process for online shopping: buyer places an order shop accepts order and delivers the goods the purchase amount moves from the buyer’s online wallet to an escrow account controlled by Group A money moves from the escrow account to the seller’s online wallet after buyer clicks to indicate satisfactory receipt of goods or automatically 7 days from the date of purchase.

Group A also has power to expel or block a shop on its platforms and debit directly against the accounts of the borrowers.

Questions: What is the nature of the credit provided by Group A? Is it a secured loan? Is this supply chain finance (movables lending)?

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How far is Mongolia from the more matured markets?Some traditional lending with “intensive controls” can already be done todayMajor developments will need serious secured transactions reforms (STR) – Can private enterprises (particularly SMEs) borrow all unsecured? Can they all rely on real estate as the basis for credit?Other key ingredients:

Knowledge development and training Government promotion and support (e.g., refinancing, insurance

funding, potentially e-platforms) Friendly credit market and payment system regulations Development of support services

How can Mongolia Catch Up?

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Thank You !

The views and judgments of this presentation are those of the author. The conclusions and judgments contained herein should not be attributed to and do not necessarily reflect the views of IFC, or its management and Board of Directors, or the countries they represent. The author, by means of this document, is not rendering any professional advice or service, and shall not be responsible for any loss sustained by any person who relies on this presentation as a substitute for professional advice or service.

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Agribusiness - One of IFC’s Strategic Pillars

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We make a difference by:

• Enhancing Productivity and Efficiency: focus on food security via increased production, waste reduction, and income enhancement

• Promoting Inclusive Development: focus on small holders, women, nutrition and risk management

• Supporting Environmental & Social Sustainability and reduce the sector’s future footprint

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UrbanizationSafe food processing & efficient supply chains

Food affordability

WaterGlobal Irrigation Program

Inputs (e.g. seeds)

Small FarmersInclusive supply chains

Global Food Security Program (GAFSP)

Nutrition & InnovationFood ingredients

Fortified foods and drinks

LandPrinc. of Resp. Agri Investment

Africa Hybrid Investments

Ukraine/Brazil

Animal ProteinMitigate impacts of full value chain (e.g., feed efficiency)

Seafood

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Six Sectoral Themes Drive Our Agenda

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IFC’s Approach to Financing Agribusiness

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Investment Services• Equity and long-term loans• Partial credit guarantees and risk sharing facilities • Syndications

Direct Financing: Corporate and Project Financing• Direct financing of agribusiness firms• Build long-term partnerships with emerging industry

leaders• Promote best practices in corporate governance and

environment and social sustainability • Implement programs to support individual farmers

and distribution companies• Provide advisory services that add value in IFC’s

financing package

Indirect Financing: Traders and Financial Institutions • Expand reach to small farms and businesses, which are

essential to the sector but too small for IFC to finance directly

• Build on local market knowledge of intermediaries (regulations, business customs, and client/ supplier reputations)

• Channel financial and advisory services to end users via intermediaries

• Develop and promote sustainability best practices through intermediaries

Advisory Services• Strengthen farmers, small businesses, supply chain linkages and infrastructure• Facilitate market development of local supply through helping farms meet quality and quantity requirements• Raise standards of corporate governance and business transparency • Support the development and uptake of eco-standards

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IFC Agribusiness Portfolio

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REGIONAL BREAKDOWN SUB-SECTORAL BREAKDOWNS

$6 billion well-diversified committed portfolio as of June 30, 2013