Farmers often complain about lack of agriculture funding, saying commercials are reluctant to finance their projects. This situation has demoralised many a farmer, with abandoning the idea of commercial agriculture altogether. However, such a challenge could be addressed by the warehouse receipt system, where farmer co-operatives or individual farmers can deposit produce and are issued warehouse receipts that are traded on the East African Exchange (EAX) platform or used by farmers to access loans from banks.

Warehouse receipt financing is a form of secured lending in which the bank advances funds against inventory goods that are being stored in a warehouse and that have been assigned to the lender. A warehouse receipt is a document provided by the warehouse operator, acknowledging receipt of produce or goods in the stated quality, quantity and other parametres. It also states the name of the depositor of the produce and the location of the warehouse.

The warehouse receipt system is not an entirely new concept. Several commercial banks have provided financing to traders against stored inventory. What’s new is the innovative application of the concept. A farmer delivers produce to an approved warehouse where the warehouse operator issues a warehouse receipt acknowledging receipt of the produce in a stated quality and quantity. The farmer will take the issued warehouse receipt to the lender to get financing against it as collateral. The lender usually discounts it up to 70 per cent of the market value of the produce taking into account the various risks that surround commodity trade. With this, the farmer forfeits ownership of the stored produce and pledges it to the lender.

This system has the potential to improve the supply of rural finance by directly easing collateral constraints and enhancing the risk profile of farmers by fostering output which in turn lead to high incomes for the farmers. This financing approach has done well in countries across the continent, like Ethiopia, South Africa, Malawi, Zambia, and Tanzania.

In Rwanda, the operation has not been unregulated, with independent collateral managers taking storing produce under tripartite collateral management agreements regulated by contractual law. However, the government has moved to regulate the warehouse receipt system, the draft law already approved by the lower house, and was tabled before Parliament by the agriculture minister in October.

About the proposed law

The law will seek to provide a formal set of rules and regulations governing the issuance and negotiation of the warehouse receipts, as well as the obligations and responsibilities in the warehouse receipt system. The law will also define the parametres of the system to keep the various players in check.

This should give banks more confidence and latitude in adopting the appropriate policies and procedures for the development of lending and collateral management policies.

Once passed, the benefits will be enormous, including reduction of the post-harvest losses, which is one of the biggest challenges faced by farmers. It will also substantially reduce risk on both quality and quantity, will enable holders to access financing from commercial banks, and it will give farmers more bargaining power, making them ‘price setters’ rather than ‘price takers’.

Challenges

However, it ought to be noted that even with the legal framework in place, there is still more to think about by the banks and other parties in the warehouse receipt chain. There challenges that could affect its success.

Firstly, there are storage and operational risks. The warehouse receipt works properly and benefits farmers where there are big and cost-efficient warehouses. This ensures effectiveness of the system and procedures that impact the value of the stored goods. From the point of arrival at a designated warehouse, a farmer needs to look out to ensure the produce is weighed accurately, and quality stated corrected as these have a bearing on the monetary value of the produce. There are also additional costs for fumigation, insurance cover and security, which eats into farmer’s projected gains, could force farmers to sell through the traditional away because the perceived benefits might outweigh the perceived costs.

Quality is an important issue to watch out for and is determined by the cleanliness of the warehouse, storage mechanism and fumigation process, all of which can’t be taken care of by legislation. The warehouse receipt is only as good as the collateral its backing.

Second is the issue credit risk. The warehouse receipts act as collateral to secure funding. Banks follow a given procedure to approve credit facilities, and given the nature of commodity trade, funds are required at a specific time during a crop cycle. The biggest challenge for banks is to validate the warehouse receipts. It is one thing to get a piece of paper, saying X amount of product at this location. Lenders need have confidence in it. They need assurances. Otherwise, they will start asking for additional security. The law should let the lenders exercise their right to liquidate the commodity in case of default.

Lenders should also be able to maintain the loan-to-market-value to keep up with the market trends through market information systems, like EAX.

Price risk is also another hindrance. Commodities by nature have volatility in prices. The essence of the warehouse receipt system is that the farmer stores their produce hoping for better prices and more gain. However, if this doesn’t happen, the farmer and the lending party who do not want to sell at a lower price are left holding low-value stock. The government, in a bid to protect farmers, also comes in and sets the minimum buying price, which might be too high for buyers. While this government intervention is supported by legislation, the question is always going to be how much this intervention should be.

The lack of business acumen among the farmers and those that operate the warehouses might also present a big challenge. Many of the warehouse operators might not understand the system and, as such, can’t aggressively market it. The lenders themselves, who are a pivotal party in the system, need to train their staff on the new and innovative financing ways.

Issues like bank staff training are not cater for in the legislation. A law will be impactful once it creates a regulatory framework consisting of warehouse legislation and a regulatory body. Access should also be open to players of all sizes, warehouses services should be provided by regulated private entities and build capacity for key players.

The author is Ace Global Rwanda Manager

richard.manzi@aceglobaldepository.com