Warehousing and collateral management systems promote access to finance

By Bob Aston

From 14-18 July 2014, the Fin4Ag Conference: revolutionising finance for agri-value chains will take place at the Kenya School of Monetary Studies in Nairobi. This meeting, among other things, will provide an opportunity for deliberation on warehousing and collateral management systems to promote access to finance.

Discussions on these seminal issues will take place on 16th July at Simba Hall during session [S17]. This session will contemplate the findings of a jointly commissioned in depth study by the French Development Agency (AFD), the International Fund for Agricultural Development (IFAD) and the Technical Centre for Agricultural and Rural Cooperation (CTA), spanning nine African countries.

The multi-country study offers analysis on what could be done to foster the emergence of public warehouse operators and accredited collateral managers, so that wider use can be made of financing, based on physical asset collateralisation.

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.

Photo credit:USDA

Warehouse receipt system (WRS) has been instrumental in combating persistent problems in agricultural marketing and credit systems. The system is helping farmers in mobilising agricultural credit by creating secure collateral that financial institutions find credible to unlock credit. Farmers empowered by secure access to credit and reliable storage facilities have the option to sell when they can get the best price for their produce.

 This is very important as smallholders in most African, Caribbean and Pacific (ACP) countries have very limited access to markets and lack facilities to store their produce. As a result, they are forced to sell their surplus produce during the harvest season when the farm gate prices are low.

It is therefore appropriate that there is a dedicated session to help participants to understand the potential of WRS, which can in turn help to improve the supply of rural finance. These developments occur by directly easing collateral constraints and simultaneously enhancing the risk profile of farmers by fostering improvements in output markets that can lead to higher farm income. It has also been helpful in mobilising agricultural credit as banks are able to accept receipts as collateral.

WRS is currently gaining prominence in ACP countries as farmers are now able to realise better market prices as their farm produce, particularly grain, can be sold throughout the year rather than just immediately after harvest. Farmers are also able to realise reduced risk in the agricultural markets, improved food security and credit access and lower post harvest losses due to better storage conditions.

My observation shows that collateral management solution reduces risk by ensuring that stored commodities remain under safe custody and comply with contractual requirements. This has helped to minimise the likelihood of financial loss.

Given the risk mitigation component of the system, the session will fittingly look at the role of WRS, which 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.

It will be interesting to hear from Ibrahima Diakhoumpa, Agricultural Value Chain Account Manager with Banque Nationale Pour le Développement Economique, Senegal who is an expert in value chain finance and pioneer of the approach “financing agricultural value chains” in Senegal.

Another key note speaker to watch out for will be Mathilde Gasperi, Project Manager, AFD - Agriculture, Rural Development and Biodiversity Division.

If you will be attending the Fin4Ag Conference, do not miss this session! Join the discussion in Room Simba on Wednesday 16th July from 11:00-12:30. Live tweets will also be sent from the session with the hashtags #Fin4Ag14 #S17.