According to the Public Relations of the Monetary and Banking Research Institute, the management summary of this report states: Value chain financing is a small part of the traditional and very diverse portfolio of comprehensive financing process of enterprises, often to provide working capital in various stages of production, trade, and the sale of goods and services. It facilitates and expedites the supply and exchange process between buyers and sellers. Value chain financing instruments have a much more general and broad function in commercial banking, international banking, development banking, and especially corporate banking. In other words, value chain financing lacks instrumental and institutional innovations in traditional and modern banking and is merely a financial platform to facilitate exchanges between firms and individuals. Value chain financing often oversees the supply of products and services of credit institutions to strengthen both the sales and the income chain of enterprises, which on the one hand, accelerates, facilitates, and promotes exchange settlement processes (cash, accrual) and, on the other hand, reduces credit risks and the lack of liquidity of the selling process of the products of these firms. Financing the value chain of manufacturing companies is doable not only during exchanges but also in the preliminary stages of production and preparation of products as soon as receiving purchase orders, in the steps of issuing inspection certificates of products before shipment from the warehouse, issuing shipping documents, issuing sales invoices by sellers or delivery of the goods in the buyer's warehouse. The various exchange instruments used in the context of financing the value chain of products are offered in the form of pre-sale contracts for export receivables, discounting of future receivables of suppliers, sale of exchange documents of economic enterprises to credit institutions, discounting of sale documents by the buyer's credit institution, financing sellers' futures transactions and repayments from future income, financing distributors, credit facilities to buyers on warehouse stock collateral, and financing sales documents for the seller before the shipment, made by credit institutions.
Value chain financing also has expected benefits for buyers, sellers, suppliers, and credit intermediaries, which strengthens the stability of the exchange relationship between supply and demand, optimizes the size and reduces the cost of working capital, increases the stability and certainty of cash flow (reduces liquidity risk), reducing the financial and operational costs of selling goods and services, increasing the stability of the production and supply chain, optimizing inventory, risk distribution, speeding up the process of allocating credit and earning money, creating new business opportunities, and reducing diversions of credit resources are among their allocation goals.
Credit institutions of organized and unorganized money markets in the Iranian economy due to restrictions from the precautionary measures governing macro facilities, the occurrence of congestion in the credit network, systematic risks in the macroeconomic environment, high finished cost of products and credit services of banks, restrictions to the brokerage relationships with the International Money Markets Credit Institutions, the disruption of the credit service delivery process through the lack of complementary institutions of money market credit operations, as well as the inefficient, traditional business models of credit institutions, can only finance small and medium-sized demand of value chain products and industries. Various products and tools are designed to invest in the money market in general and also to finance the value chain of products in particular, generally in the form of credit withdrawals from bank accounts, intermediary financing, and financing by discounting export accruals and long-term sale of goods, discounting individuals' claim documents, discounting debt acceptance documents, business facilities, leasing facilities, financing facilities for capital goods, raw materials and equipment, reciprocal sale and self-financing of capital goods of production development plans, financing of equipment and real estate in the form of lease and rental facilities, etc.
Firms of different economic sectors are based on components such as production capacity, operating economic sector, value chain length, the share of exports in production, value-added size, and longevity of the firm, applying for various credit instruments and products (Rials and foreign exchange). These instruments are complementary, and it is practically impossible to replace many of them. In this regard, foreign exchange financing credits for large economic projects (high value-added and limited employment share) are often made through long-term financing contracts, cross-selling, self-financing from international monetary markets, or relying on financing contracts from the National Development Fund. While long-term capital facilities, as well as financing of Rial value chain with small and medium sizes, are provided in the form of financing contracts of civil partnership, installment sale, the lease on conditional ownership, Murabaha Sukuk, and Istisna to buy machinery, equipment, and economic innovations through enterprises. Unlike foreign exchange markets in emerging economies, the above-mentioned set of foreign exchange and Rial facilities (initial investment and working capital) are practically irreplaceable. In addition to the above long-term facilities, in practice, large and medium-sized foreign exchange facilities for large and medium-sized imports of raw materials and production equipment, as well as medium-term Rial contracts for value chain financing (purchase of equipment and raw materials in the form of Murabahah, Mudarabah, debt purchase, installment sales), with small and medium sizes (complementary nature) were used by enterprises. The set of these facilities along with other credit services such as issuing guarantees and documentary credits (in Rials and foreign currency), issuing various types of cheques and bills along with providing financial support services (payroll accounting, fund management, commercial and non-commercial insurance, market analysis, etc.) have provided various packages of credit supplement services to finance the value chain of enterprises, which have been offered jointly and under a single contract and in the form of corporate and private banking business models by some credit institutions and banks. In this regard, the lack of integrated supply of these credit services packages by the credit institutions has caused financial-credit bottlenecks in various stages of construction, development, marketing, operations, and fund management of many businesses, along with systematic periodic macro risks, has aggravated the disruptions in the production cycle and value chain of these firms.
The process of offering different credit products to finance the value chain of firms in different sectors of the economy is affected by four crucial and often incompatible challenges, including the limited lending capacity of credit institutions (compliant with financial health regulatory criteria), the low credit rating of many internal firms, limited capacity for authentication as well as large and medium-sized financing demands of selected firms. The financing capacity and supply of credit services of the major banks of the country, taking into account the accumulated historical losses, the deficit of non-current receivables as well as the continuous deficit of reserves related to operational and market risks (in Tier 2 capital), have practically limited their prudential credit capacity, such that credit services, as well as value chain financing, have also double-constricted in size for medium-sized enterprises. In this regard, finance institutions active in the capital market, due to the small base capital, are practically faced with limited institutional financing capacity to finance the value chain and the initial investment. Due to the small size of the basic capital, the country's credit network is practically faced with limited institutional lending capacity (by the precautionary criteria governing extensive facilities, syndicates, and beneficiaries under the Financial Health and Precautionary Supervision Regulations), along with the challenges of credit rating and the ambiguous credit rating of credit applicants, as well as the high demand for corporate credit facilities (to benefit from economies of scale), it has virtually challenged the corporate financing process. Managing these challenges through the use of a credit-based approach to risk management in credit institutions (credit, market, operational, and liquidity risks), the realistic focus of money market institutions' credit capacity around small and medium-sized facilities (for agriculture, animal husbandry, fisheries, construction, land transportation, warehousing, various service sectors, mining, food and beverage industries, clothing industries, printing industries, machinery manufacturing industries, construction materials industries and also non-metallic mineral industries with very high employment share), made it possible to continuously offer various packages of credit services and products to the companies applying for financing, as well as to use a comprehensive credit platform to validate and continuously monitor the credit rating of individuals and companies applying for facilities. In this regard, the possible improvement of brokerage relations with international money market credit institutions (foreign branches and international operating banks) will pave the way for further opening up the financing process by providing large-scale, long-term foreign exchange facilities for enterprises (oil and gas, power, metal mineral industries, petrochemicals, automobiles, telecommunications, water, air and sea transportation, hotel and leisure services, etc.).
To facilitate and expedite the process of financing through the supply of credit products and tools, in the first stage, a comprehensive credit platform should be created to identify and validate individuals and businesses to determine the credit rating and potential risk (possibility of default) of each applicant based on historical tax performances, audited financial statements, commercial and business insurance contracts, the combination of financial and non-financial assets, as well as the historical turnover of financial and credit banking transactions, historical performance of potential and actual liabilities in the organized money market (current and default), etc. calculated and monitored. In practice, the credit ceiling of economic enterprises and the combination of documents corresponding to the credit rating of enterprises should be determined for financing. In this regard, designing another comprehensive platform for recording and monitoring the exchange of goods and services with auditing capability (auditing and tax monitoring by the Ministry of Science or the Ministry of Economy) is necessary to finance the process of supply chain production and equipment supply through discount or facilitate the validity of electronic invoices for various economic sectors in general and agricultural and service sectors in particular. Medium-term financing of electronic invoices for the purchase of raw materials and equipment of firms (payment to the supplier), in addition to financing electronic invoices for the sale of their products (payment to the buyer), on the one hand, makes the possibility of distributing credit risk related to working capital financing and even purchasing equipment between the firm and third party, and on the other hand, provides the basis for monitoring credit facilities at different stages of a firm's value chain of production (non-diversion of facilities).
Ambiguity in the credit rating of applicants for facilities and financial services of credit institutions and banks, along with limited ability to certify securities of the financing process, are two of the most critical challenges of the non-governmental sector in the country's money market, which has dramatically increased the credit risk of this market. To manage these challenges, firms in various economic sectors in general, as well as enterprises in the agricultural and service sectors (small and medium-sized) in particular, merge and strengthen existing trade union credit unions by increasing member capital, allocating managed public sector funds, and volumetric contracts of allocation of banks' credit resources to credit cooperatives (with group responsibility) can be recommended to transfer part of the financing requests of small enterprises from banks to credit cooperatives on the one hand and on the other hand by using the mutual guarantee mechanism of the intra-consolidation credit risk of micro-activities should also be adjusted.
Click here to receive the report.