3. Innovative Supply Chain Finance: Jinchang Lai Principal

Jinchang Lai
Principal Operations Officer, and Lead for Financial
Infrastructure, Finance and Markets, East Asia &
Pacific Region
Ulaanbaatar, December 15, 2014
Example of a Supply Chain
Rice 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
Who are the chain actors? How many? Their dependency on
the chain performance
Governance of the chain: strength of the chain leader; and
allocation of risks and benefits
Competitiveness of a chain -- efficiency, synergy, reliability
and innovativeness -- and its positioning in the market
Strength of social capital
Vulnerability to policy, regulatory and systemic risks
Commitment to environmental, safety and social
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Linkages can be Powerful for Lenders
Modern productions are mostly done through collaborations
among supply chain players
The movements of goods and services along supply chains
result in changes in accounts receivable (AR) and inventory
These (and the associated information) can be leveraged to
make financing available for suppliers, processors, buyers and
services providers
The presence of financing can strengthen social capital,
increase the efficiency and competitiveness of a chain
The greater information efficiency, stronger incentives and the
organized payment/settlement mechanisms reduce
transaction cost
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Example of a Supply Chain Finance System
Poultry Production
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Why Supply Chain Finance?
Lending institutions want the information mechanism and
incentive structure embedded in a chain
They want to leverage “other people’s existing networks”
for the distribution of products and services
And ... even better ... to make the clients “captive”
Also ... to substantively shift risk exposure vis-a-vis small
borrowers to the larger suppliers or buyers
Whether 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?)
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Why Supply Chain Finance?
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 finance
While “movable asset finance” (movables finance) is a
conceptual term, there are many business names and
brand names for the various credits secured by movable
Supply chain finance is one of those business names
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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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How Do Lenders Grow Up?
Stage I: Lending to the supply chain actors individually;
occasionally, clients introduce their supplier or buyer to the lender
as potential clients
Stage 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 exposures
Stage III: Actively promote non-credit products and services; even
use chain relationship to distribute other players’ products for a
Stage IV: Organize all actors in an Internet-based platform for
optimal solution to each client; digitalization of information,
services and financing
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What is So Special about
Agri Supply Chain Finance?
Systemic risk; and the need for insurance
Uneven pattern of cash flows
Suppliers, aggregators/buyers as well as the government are
the major providers of credit, not just financial institutions
Core chain participants are mostly individuals/households
Lenders 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 agreements
Payment and cash management mechanisms can help to tie in
small clients
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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 ecommerce player have in comparison to the traditional commercial
 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
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Example of an Online
Supply Chain Finance System
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A New Generation of Players
An 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
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 can Mongolia Catch Up?
How far is Mongolia from the more matured markets?
Some traditional lending with “intensive controls” can
already be done today
Major 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
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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
We make a difference by:
Enhancing Productivity and Efficiency:
focus on food security via increased
production, waste reduction, and income
Promoting Inclusive Development: focus on
small holders, women, nutrition and risk
Supporting Environmental & Social
Sustainability and reduce the sector’s
future footprint
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Six Sectoral Themes Drive Our Agenda
Global Irrigation Program
Inputs (e.g. seeds)
Inclusive supply chains
Global Food Security
Program (GAFSP)
Princ. of Resp. Agri Investment
Africa Hybrid Investments
Safe food processing &
efficient supply chains
Food affordability
Animal Protein
Mitigate impacts of full value
chain (e.g., feed efficiency)
Small Farmers
Nutrition &
Food ingredients
Fortified foods and drinks
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IFC’s Approach to Financing Agribusiness
Investment Services
• Equity and long-term loans
• Partial credit guarantees and risk sharing facilities
• Syndications
Direct Financing: Corporate and Project
Indirect Financing: Traders and Financial
• Direct financing of agribusiness firms
• Build long-term partnerships with emerging industry
• 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
• 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
• 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
$6 billion well-diversified committed portfolio as of June 30, 2013
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