Appropriate Warehousing and Collateral Management Systems in Sub-Saharan Africa

Dec 14, 2015
Warehouse receipt finance (WRF) is an ancient financing technique that has been found on Mesopotamian clay tablets. WRF played an important role in the financing of agriculture and agricultural processing in the USA and Europe. It is widely used across the developing world - but mostly for the financing of import and export operations. In recent years, there has been much effort by governments of developing countries (supported by their development partners) to extend its use to national agricultural value chains. So what's an agricultural warehouse receipt system (WRS)?
It is a re-emerging financing system whereby agricultural commodity warehouses with qualified warehouse operators and collateral managers provide storage and collateral management services intended to facilitate access to warehouse receipt finance and other forms of commodity-based finance in favour of smallholder farmers. If financial service providers have a warehouse receipt finance product that is accessible to farmers, then such a product gives qualified farmers the flexibility in timing their sales. Instead of selling their commodity to meet immediate cash-flow needs at peak production season when commodity prices are generally at their lowest levels, the farmer can store their commodity in a qualified warehouse and postpone selling to a later date when prices are supposed to be higher. The farmer then uses the commodity in storage to pledge as collateral for a loan which is used for the immediate cash-flow needs. From the financier's perspective, warehouse receipts, when used as collateral, can facilitate lending to farmers. Warehouse receipt finance also makes it possible for processors to fund the stock they need for their operations throughout the year and for exporters to optimise the timing of their expected sales. In addition, it gives international banks a way of bringing loans to customers at interest rates that tend to be lower than those offered by local banks. However, there are some pros and cons of WRS within the context of the smallholder farmer. WRS could strive better under conditions of some form of guaranteed higher future prices compared to the usual low prices experienced during the peak harvest season. Hedging instruments to reduce the risk of adverse price movements include contractual arrangements like futures or exchanged-traded and forward or private agreements. However, these kinds of price volatility risk management mechanisms are a little more sophisticated at smallholder value chain level, leaving the price-taker farmer vulnerable to marked-to-market speculation. Whatever the case, the difference in prices at harvest season and time of sale must be able to cover the full cost of warehousing plus interest paid on the loan taken to respond to immediate cash-flow needs at harvest. Yet, WRS has proved difficult, partly because local financiers - the most logical candidates for financing national and regional agricultural trade flows - are usually unfamiliar with the WRS approach and they are also wary about the adequacy of commodity pricing mechanism, political, legal and regulatory conditions that surround its use. What about a one-size-fits-all WRS for the smallholder farmer in Sub-Saharan Africa (SSA)?
An investigation in the situation on the ground in nine SSA subject countries (Burkina Faso, Cameroon, Côte d'Ivoire, Ghana, Madagascar, Mozambique, Niger, Senegal and Uganda) identified bottlenecks to the wider use of various forms of WRS and formulated proposals for action. The investigation arrived at technical and legal recommendations, some of which are quite country- and context/commodity-specific, while others could be generalized, albeit with caution. The investigation came up with four main types of WRS, with the first type as the most appropriate for SSA smallholder, and the other three as a little more advanced at this time for the SSA smallholder who is yet to produce commercial volumes to be able to tap into such more advanced WRS types.
However, one or two or all three of the other types or in some combination thereof, is the direction in which commercially-oriented SSA smallholder ought to be heading towards. The four types are:
  1. Type A for community inventory credit for smallholder farmers: This type is often supported by microfinance institutions (MFIs), which re-finance their operations with commercial banks. Stocks are normally held under a double-padlock arrangement in community stores or domestic buildings, with the keys to one lock held by the producers' organisation (PO) or group of farmers, and the other by the MFI.
  2. Type B for private warehouse receipting: This system provides financing against commodities stored in a private warehouse under the control and responsibility of a collateral manager (CM). This can include a field warehouse, where the goods are held in the borrower's store, which is temporarily leased to the CM.
  3. Type C for public warehousing: This system provides financing against commodities stored in a public warehouse. This is a warehouse that is open to depositors from the general public; it does not mean that the warehouse belongs to the State; indeed most public warehouses are privately owned.
  4. Type D for lending against the security of current or future production: In this case, the funding agencies lend against a documented security representing current or future production. This is the typical; system depicted under the value proposition for warehousing discussed above.
_________________________________________________________________ This blog is adapted from AFD/CTA/IFAD-PARM co-publication on warehouse receipt finance in Africa. For the detailed study, please, click here: About the Author Dr Jonathan N. Agwe (DM) is one of the Senior Technical Specialists in Inclusive Rural Financial Services in the Financial Assets and Markets (FAME) Cluster at the Policy and Technical Advisory Division (PTA) of the Rome-based International Fund for Agricultural Development (IFAD). Prior to joining IFAD, Jonathan worked as Operations Officer in the Washington-based World Bank's Department of Agriculture and Rural Development for 13 years. And before joining the World Bank, Jonathan worked over 12 years, developing private and public sector programs for smallholder and commercial agricture in Cameroon.Jonathan N. Agwe has a cumulative work experience over 29 years and holds a Doctor of Management (DM) degree in develeopment management from the University of Maryland University College, USA.

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