This document discusses warehouse receipt financing as a means of financing agricultural value chains in East Africa, its challenges, and ways to improve it. It outlines the concept of establishing an organized grain trading market with transparent roles. Warehousing provides post-harvest liquidity for farmers, but faces challenges like lack of market confidence in warehouses and receipts. Improving collateral management services can help overcome issues and enable more agricultural financing by banks. The benefits of effective warehousing and collateral management include convenient financing for borrowers and more lending opportunities for banks with secure collateral.

1. Ware house receipt financing
as a means of financing the
agricultural value chain
Its challenges and way forward
Wangwe Richard
Agriculture Finance

2. 2
Simple Warehousing Ilustraion
Farmer/TraderBank
Quality Assaying of
Commodity
Pledging WH receipt
WH Receipt
Financing
Third Party /
Own Warehouse
Appointment of
Collateral Manager
Deposit
Commodity
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3. The Concept
• System of establishing a market where participants
in the grain trade are organized to perform their
roles openly and transparently
• A harmonized system of trade that is free and fair
among the various actors along the entire value
chain
• Allows efficiency arising from recognized trading
rules, use of contracts that are enforceable and
arbitration

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Warehousing in East Africa has Multiple Dimensions…
 Post harvest liquidity &
better price realisation for
farmers.
 A sine-qua-non for
efficient commercial trade
in agro-commodities.
 Backbone to commodity
exchange – Futures &
Spot.
 To boost Agro & food
processing industry
PRODUCE
VALUE

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Post harvest liquidity…
A Major Challenge
• Limited access to price & market information
• Present agro produce marketing system is inefficient & fragmented
• Warehouses, their management & receipts issued by them do not
enjoy market confidence
• Despite being one of the oldest lending products, warehouse receipt
funding has been a “no-no” for banks
• Higher margins & interest rates do not leave viable option for farmers

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Commodity funding, Major Challenge and
Inhibiting issues
Warehouse
Facilities
•Unreliable performance of warehousemen
- fraud & mismanagement
• High charges levied to farmers/traders
Warehouse
Receipts (WR)
• Negotiability of warehouse receipts
•Non-uniformity of WRs
•Electronic and
•Manual
Collateral
Management
Services
• Responsibility not understood properly
•Few quality service providers
•Cost of services

7. 7
Risk
Management
Issues
• Price knowledge
• Low offtake capacity due to lack of adequate
working capital
• Non-acceptance of WR: Tradability without physical
delivery
Commodity
Related issues
•Poor Quality Standards/Lack of standardization
• Co-mingling / Fungibility risks
• Unnecessarily Long Marketing Chain and
Surpluses at harvest periods
Other issues
• Double-financing of stocks
• Contract defaults
•Mutual suspicion and distrust among players along
the chain
Commodity funding, Major Challenge and
Inhibiting issues

8. 8
The concept of Collateral Management Services and benefits to the
Banking sector as a major enabler to Agriculture finance
• “ Collateral ” as understood in Indian banking parlance is “secondary
source of payment obligations”
• “Collateral” in the present context is an asset / 3rd party commitment
accepted by the Collateral Taker (Bank) to secure an obligation of the
Collateral Provider
• “Collateral Management (CM)” involves managing the collateral on
behalf of the collateral taker. CM transactions are intended to protect
against performance risk of counter party
• Banks have traditionally been assets based lenders –with hardly any
knowledge of asset financed
• Reach of Banks, pvt. sector Banks in particular, coupled with lack of
domain expertise
• Banks, Public & Private, under pressure to expand agri credit
portfolio, sound collateral management therefore to become major
enabler

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What Collateral Managers do ?....
• Identify various inherent and external risks associated with collateral and
mitigate these risks with integrated risk management system
• Audit , Accredit & Provide storage facilities for commodity funding
• Quality and Quantity assurance for both lender and borrower, backs the same
with guarantees and insurance
• Arrange quality certification and quality protection services
• Manage storage facilities adhering to operational standards for minimizing loss
and risks
• Provides services for total control on stock
• In-bound and outbound logistics support
• Advisory and Inventory Management services
• Collateral status reporting on periodical basis
• Facilitating disposal of collateral, as and when required
End to end commodity management solutions & risk management practices
targeted to minimize collateral risk and maximize returns to counter party

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Warehousing Prerequisites
• Collateral Manager with proven track record, adequate financial
strength & domain knowledge
• Storage facility audit to determine suitability for stored commodity
• Quality and quantity determination for proper valuation
• Leasing arrangement for legal management control over
commodity
• Proper lien noting
• Proper documentation including secure warehouse receipt,
insurance coverage , etc
• Access , Security and administrative staff to establish control on
pledged stock

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Warehousing...Benefits
• Lender
• Very convenient and cost effective lending mechanism
• More opportunities for expansion of lending portfolio with
secure collateral for borrowers like millers , processors ,
exporters
• Stock management by domain experts
• Regular update on stock health & commodity care
• Make free from any inclinations or prejudices about stock
funding
• Assurance of quality and quantity to ease the funding
process

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• Borrower
• No service location limitations
• No extra cost involved in logistics, warehousing & handling
• Convenient and low cost solution for working capital
• Collateral remain in assurance circle and remain fully usable
• Credit without hassling production process at processing
locations
• No additional cost involved in reducing risk perception
• Make free from administrative and transactional procedures
Field Warehousing...Benefits

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CM Arrangements with Banks
• Collateral Manager responsibilities
• Storage facility audit for structural integrity
• Commodity quality testing and certification
• Issuing warehouse receipt with commodity value and quality grade
• Marking of pledge / lien
• Risk Management of collateral
• Collateral Manager’s liability
• For anthropogenic damage CM is liable with provision for standard deduction
• Stock management
• Basic Risk Mitigation practices
• Full stock value insurance and security arrangements
• Know Your Customer (KYC) process as stipulated
• Fidelity guarantee to cover employee related liability
• Stock released only after delivery order from bank

14. Some Issues Raised by Value-Chain Stakeholders
• The role of regulators – in regulation and confidence building in the
WRS – standards, performance bonds, insurance
• Markets – how are the markets determined
• Bulking centres – distance, sensitization, etc
• Warehouse standards and collateral integrity – capacity, skill and
integrity of the warehouse operator
• Risk profile of the staple foods value chain – for the banks
• Product-buy in by the Banks – based on the new WRS using electronic
negotiable receipts
• Valuation risks – banks concerned about how market volatility may
affect the collateral value of stocks held
• Market and price information – for the farmers and banks
• Tariffs and other transactional costs – especially for the farmers and
traders
• Standards of the produce – produce buyers and regulators

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Thank You
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