Case study-2 :

Contract farming and value chain financing :

Background : A Commercial Bank partnered with a food processing company and local tomato farmers in Natore Districts to support a contract farming model. Under the agreement :

(i) The bank disbursed input loans (Seeds, fertilizer, irrigation, training) to 200 farmers.
(ii) Loons were repaid post-harvest when tomatoes were sold to the processing company at a pre-agreed rate.

Financing structure :

-Loan size Tk. 20,000 per farmer..
-Interest rate 9% per annun.
-Repayment period 06 month
-Payment collected directly through the company.

Challenges :

-A few farmers diverted impute to non-contract crops.
-A local market offered higher price encouraging side-selling.

Outcome :

-Despite challenges, 92% of loans were recovered on time.
-The model helped farmers access quality inputs, technical support and assured market.
-The bank planned to scale up the model to other crops and districts.

Tasks to do :

(i) Draw a diagram illustrating the flow of goods, finance in this value chain.
(ii) Identify the roles of each actor in reducing credit risk.
(iii) Discuss the risk of side-selling and suggest solutions.
(iv) Calculate the total loan disbursed and estimate total interest income.
(v) Design a revised loan agreement that includes penalties for side-selling.