Nine-country report proposes way forward for warehouse receipt finance

A new study into warehouse receipts and collateral management was unveiled this week at the Fin4Ag conference in Nairobi.

The 200-page report dissects the experiences of nine countries examining lessons learned and highlighting potential ways forward in one of the most exciting fields of agricultural finance.

The interim report was commissioned by CTA and Afraca and is a collaboration involving law firm Sullivan & Worcester and J Coulter Consulting.

It focuses on Burkina Faso, Cameroon, Ghana, Niger, Senegal, Uganda, Mozambique, Cote d’Ivoire and Madagascar.

Madagascar’s community warehouse system – under which farmers store produce under their own name in funder- or communally owned storage facilities - is one of the success stories highlighted in the report.

Two leading microfinance institutes (MFIs), refinanced by banks, have “built themselves around the product from the beginning”, leading to “wholehearted” adoption, says Jonathan Coulter, director at J Coulter Consulting. The system has had a positive impact on farmers’ livelihoods and also helped stabilise prices.

Madagascar also demonstrates how community warehousing can be a springboard for private warehousing, with MFIs already moving towards collective warehouses to bring down monitoring costs, he says.

Challenges however include instances of risky behaviour, such as the financing of crops with a 100% loan to value rate. The national regulator needs to focus on regulating not just MFIs but the product, and more technical assistance is required, Coulter says.

Within public warehousing overall, another challenge is that sites with capacity of less than 1,500 tonnes can be economically unviable.

The report also examines the legal structures that support or inhibit warehouse financing in the nine countries, and proposes ways forward.

“The legal framework – or the lack of it – in any jurisdiction is going to have a massive impact on warehouse receipt finance,” whether you are a smallholder, collateral manager, MFI or bank, notes Sam Fowler-Holmes, associate at Sullivan & Worcester.

Five of the countries in the report are part of the so-called OHADA group, which have a shared legal framework. “Trying to develop a warehouse law that could apply across all of them is incredibly difficult” and this means that there is “very limited regulation in place for some of the key participants in the warehousing chain,” Fowler-Holmes says.

Of these, Cote d’Ivoire has perhaps made the most progress in creating a quasi-system supporting warehouse finance. There is, for example, a law in place that requires collateral managers to be licensed by the government and to hold insurance cover against theft, fire and damage. There are also special regulations for collateral managers dealing in coffee, cocoa, cotton and cashew nuts as well as commodity-specific standards that provide comfort to lenders, he says.

There is however a question mark over when proposed warehouse financing legislation – initially planned to be voted on by parliament in April 2014 – will be pushed through.

The report also makes recommendations that could support warehouse receipt finance in many of the countries covered.

These include the licensing of warehouses, warehouse operators and collateral managers to improve confidence in the system, according to Geoffrey Wynne, director at Sullivan & Worcester. Countries are also advised to create negotiable warehouse receipts – a move that would help with taking security of goods and transferring title.

Countries should abolish stamp duties and lower or remove registration fees to incentivise registration, he says. They should also introduce the legal right to enforce security by private sale and are advised to create electronic collateral registries that are accessible by the public.