New law a ‘big leap forward’ for local commodities exchange, experts say

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EAX’s Ngoga explains how climate change is affecting the quality of maize during the interview. (Stephen Nuwagira)

The local commodities exchange has been growing at a slow pace, and has been characterised by low volumes over the past two years. The exchange operated by East Africa Exchange (EAX) has a few traded commodities, mainly maize and beans. However, this could soon be history thanks to new initiatives by Capital Market Authority (CMA) and EAX geared at attracting more farmer participation to boost volumes and ensure sustainable supply.

Robert Mathu, the CMA chief executive, said the local commodity exchange is growing at a slow pace because Rwanda does not have a lot of commodities, adding that a commodity exchange thrives in an environment with a huge flow of commodities.

He, however, said this would be addressed with ‘massive’ sensitisation campaigns to educate the farmers on the benefits of the exchange and the warehouse receipt system and how it can add value to them.

New law is huge boost

He added that the exchange will also be streamlined and strengthened thanks to the recently-approved law. The legislation establishing CMA and determining its mission, organisation and functions was passed by Parliament last month.

Mathu said the law, that is yet to be published in the national gazette, gives CMA the regulatory authority over the exchange traded commodities and the warehouse receipt system, adding a commodities exchange should operate under a clear law and regulations.

“Currently, we (CMA) only provide an oversight role while the exchange is more or less self-regulatory, while awaiting for the approval of the new capital market law which will eventually be followed by the publication of the two other related laws,” he said. Mathu said the two new laws – the Exchange Traded Commodities and the Warehouse Receipt System – could not be published before the changes in the recently-passed CMA law.   

He added that the warehouse receipt system law sets a leveled playground for players by “putting in place rules and regulations governing the issuance and negotiation of the warehouse receipts”.

He said it will also encourage farmers to embrace the initiative, a move that could help reduce post-harvest losses “as there are infrastructures (warehouses) for storage of the product, ability to secure financing using their produce as collateral, and farmers can become price setters rather than price takers,” he noted.

Mathu pointed out that financing institutions will now ‘feel a little bit of comfort’ to support the agriculture sector owing to the guarantee given by the legal framework and receipt system.

EAX has traded over 20,400 tonnes of produce on its platform since it started operations in 2014, according to Ngoga, and targets to sell a high of 35,000 tonnes of grain this year.

Big leap forward

Meanwhile, Bahati Weslars, the operations managers at Rwanda Grains and Cereals Corporation (RGCC), said law portends good times for the agriculture sector, adding that farmers will be able to access finance to buy quality inputs and plant in time which is crucial to enhance production and household incomes.

This will, ultimately, increase traded volumes and commodities on the exchange.

According to Olivier Ngoga, the East Africa Exchange (EAX) operations manager, the law is strategically important to manage the sector and a ‘big leap forward’ that will help avoid informality and abuse in the sector, as well as protect farmers and other stakeholders.

Ngoga added that previously, banks refused to fund farmer activities under the warrantage system (also known as double padlock system) because of lack of warehouse or handling services.

“Therefore, this law will protect all the stakeholders and gives banks confidence to deal with farmers, which is a key milestone for agro-funding in the country,” he told Business Times in an interview last week.

“With the law in place, we are optimistic that in four to five years the commodities exchange and related activities will have fully been transformed and streamlined to attract more players and tradable items,” he added.

Creating awareness

Ngoga said EAX was engaging other stakeholders and farmer cooperatives to encourage them to embrace the warehouse receipt system, adding that the new developments have created confidence and made the sector more credible.

“We have partnered with the World Bank, IFC and KCB Bank Rwanda to promote the scheme holistically. We also conduct regular outreaches in collaboration with the agriculture and trade ministries about the benefits of the exchange,” he said.

He revealed that farmer cooperatives and individual farmers have benefited from $1 million (about Rwf843 million) in loans under the warehouse receipt system, thanks it EAX partnership with some local banks.

Challenges

“Farmers have not yet understood the warehouse receipt system to fully embrace it,” Ngoga said, adding that financial institutions also need to embrace the model.

According to Mathu, farmers are reluctant to use the system because they don’t understand how it works. He pointed out that when a farmer harvests, they expect to get money for their produce to cater for their basic needs, pay for their kids’ fees or buy seeds and other farm inputs.

“They expect this cash on the spot. So telling them to bring and store their produce in a warehouse and then wait for weeks or months to get paid creates skepticism,” he said, adding that some farmers still cynically think that the EAX may have replaced the traditional middleman.

Besides, the essence of the EAX is to connect farmers to markets, but some farmer cooperatives have a direct link to the buyers and, therefore, see no reason to deal the EAX, Mathu said. 

Addressing challenges

Ngoga called for policy harmonisation across the region, saying this will deepen trade and ease transactions.

The lack of storage facilities is also a key issue that affects traded volumes since most farmers are located in rural areas where there are no warehouses. The challenge of informality in grain trade both locally and in the region affects the exchange

Ngoga said efforts to improve storage facilities across the country are crucial to address the challenges of quality and traded volumes.

“The lack of storage facilities is also a key issue that affects traded volumes since most farmers are located in rural areas where there are no warehouses. The challenge of informality in grain trade both locally and in the region affects the exchange Banks also need to be able and willing to finance farmer projects,” Mathu said.

“Agriculture is a season-based industry, so the continued mismatch between the crop cycle and the time required to process farmer loan applications needs to be bridged,” he added.

Warehouse operators need to be equipped with proper business knowledge and the understanding of the system as they deal directly with farmer cooperatives on a day-to-day basis. “If they can’t explain to farmers how the system works then the farmers are never going to embrace it,” he pointed out.