Financing small-scale businesses and farmers in Ghana

What lessons about institutions and business relationships can be learned from the informal sector?

Findings of a new study from Ghana have illuminated an innovative and little understood financing model from the palm oil industry.

The study, commissioned by SHARP and available as an executive summary here, describes the predominant type of financing used in Ghana for small-scale production of crude palm oil (CPO) for non-industrial markets in Ghana and neighbouring countries. It is known as the buyer advance payment system (BAPS) because end buyers of CPO make advance payments to CPO processors via traders, several weeks before delivery. BAPS is an informal contract relationship which uses price hedging, which has advantages and disadvantages for suppliers and buyers within the system.

The authors conducted fieldwork earlier in 2015 in Ashanti, Eastern and Western regions of Ghana and interviewed actors throughout the supply chain.

Their study provides fascinating insights into how business models evolve, not only in the absence of widespread and affordable access to finance through formal channels but also outside vertically coordinated supply chains. Although small-scale processors seek money for working capital and assets from a range of formal and informal sources, the advance payments they receive from end buyers are their main source of finance. The authors emphasize the importance of trust in the business relationships and describe a range of institutions that have developed for the BAPS system to function. Of particular interest is how buyers cope with side-selling of CPO by some processors and the weaknesses in the system which encourage it.

"The BAPS system helps to finance local businesses and entrepreneurs in the shape of individual CPO processors, most of whom are women"

Crucially, the BAPS system, and the production model that it supports, help to finance local businesses and entrepreneurs in the shape of small-scale mills and individual CPO processors, most of whom are women. It also indirectly funds the production of fresh fruit bunches (FFB) by smallholders who fall outside formal contract farming or outgrower schemes attached to plantations and large-scale mills. Around 80% of the advance payments received by processors go to oil-palm farmers via FFB purchases, and some processors also provide credit to their farmer suppliers by advancing money at the start of the season.

Nevertheless, the BAPS system does not offer direct financial support to independent smallholders, and one conclusion of the study is that both they and the processors that they sell to need better services from formal and semi-formal lenders, as well as technical assistance and better governance.

The full report of the study will be published here. It is relevant to people involved in the palm oil industry as well as those with an interest in contract farming and private sector development in other commodities.