Creating critical mass in warehouse receipt finance

By Bob Aston

Warehouse receipt system (WRS) is increasingly being seen as an essential institutional component in programmes to modernise and improve the efficiency of agricultural marketing systems, as well as, improved access to finance. The system is helping farmers in mobilising agricultural credit by creating secure collateral that financial institutions find credible to unlock credit.

The importance of WRS led participants at the Fin4Ag Conference: revolutionising finance for agri-value chains, which took place at the Kenya School of Monetary Studies (KSMS) from14-18 July, 2014, to look at how a critical mass in warehouse receipt finance can be created.

Participants listening to the proceedings

Session 32: creating critical mass in warehouse receipt finance which was chaired by Kofi Adomakoh, Director, Project & Export Development Finance, African Export Import Bank, Egypt, looked at what should be done to make warehouse receipt finance accessible to a larger number of value chain players, how to shift focus to public warehousing, ways of spreading out collateral management and if banks can be incentivized to do more warehouse receipt finance.

Speaking while addressing participants, Dr. Gideon E. Onumah, Agricultural Economist/Rural Finance Specialist, University of Greenwich, United Kingdom, explored ways of creating critical mass/scaling up warehouse receipt finance.

He noted that inspection companies are pulling out from warehouse receipt financing rather than expanding. This he said limits scope of stock monitoring. He added that demand side issues has limited oversight capacity of clients and financiers, he also noted that non-negotiable warehouse receipt system limits utility in promoting trade (and potential in using trading platforms to ease liquidation risks).

Dr. Onumah called for better oversight system by financiers as well as having independent financiers. This he said will help in ensuring easier physical access to smallholder, reduced cost of services and facilities and better storage of household food services.

“Some challenges faced are oversight issues as it is difficult at times to know who is in charge. There is also scale diseconomies and non transferable warehouse receipt system limit and weak quality assurance systems which limit trade potential,” said Dr. Onumah.

He said expanding public warehousing will ensure there is wider access and locally traded commodities, structured trade can be fostered as it will ease liquidation problems for financiers and thus benefit farmers and traders.

“Combining structured trading and financing systems enhances price risk management .It is also important to Strengthen aggregation and collective marketing capacity of farmers’ organisations,” said Dr. Onumah.

Participants following proceedings

On his part Bohay Nicomed, Senior Manager Agribusiness & Syndications, CRDB Bank Plc, Tanzania looked at their experience as CRDB bank Plc in commodity based lending since year 2000.

“Most village warehouses are small with capacities that do not make economic sense to run warehouse receipt system. These are therefore used as collection centres,” said Nicomed.

He noted that innovation in payment solutions like mobile phones, debit cards and cardless payments under warehouse receipt system would help in ensuring prompt payment. He added that proving an enabling environment through legislation, establishment of a regulatory authority and having licensed warehouse operators would help in increasing access to warehousing facilities.

Warehouse receipt financing is a loan extended by a bank, a micro-finance institution or a supplier that is secured by collateral created using a crop stored in a warehouse operated by a third party or collectively by a representative group of farmers.