Finding real scale with warehouse receipt finance

One of the biggest challenges with warehouse receipt finance is that it needs to reach a certain scale before the perceived benefits to farmers and traders justify the high costs associated with warehousing and collateral management.

 

To address these costs and reach critical mass, banks need to engage more with collateral managers, take a more proactive role in assessing on-the-ground risks, and invest more in risk management tools and solutions like mobile payments. Farmers need to organise themselves into groups to achieve economies of scale, and central banks need to control the high interest rates prevalent in Africa and to recognise warehouse receipts so that regulators can develop a legal framework that protects financiers, speakers and delegates told the Fin4Ag conference.

 

Using the services of a collateral manager can cost anything from $1,000 to $10,000 a month, notes Richard Wangwe, East Africa director at the Africa Enterprise Challenge Fund. This is often prohibitively high especially for farmers who store grain for long periods with the aim of securing a higher price for it later and is slowing the industry’s growth.

 

“If he’s keeping grain for three months but the cost of keeping it is higher than what he will get, he will not bring it next season,” he says.

 

Warehouse receipt finance is also not always used most efficiently. Contrary to common belief, it is better suited to crops with a liquid market that can be sold quickly than to crops where a buyer is not always immediate, Wangwe argues. The cost of a warehousing system can be covered more easily if produce is moving in and out of it regularly, rather than being hoarded for long periods in the hope of a price rise, he explains.

 

The costs of using a collateral manager can act as a “disincentive” for farmers, wiping out any gains they make from using the service, agrees Abdou Matieyedou Konlambique, programme officer, market access programme at AGRA. “We need to innovate, and develop risk-management tools to make it work,” he says.

 

CRDB Bank in Tanzania has managed to cut the interest rates for its warehouse receipt finance product to just 4%, according to Bohay Nicomed, senior manager, agribusiness and syndications.

 

It does this by wrapping it inside a wider value chain finance solution under which it uses letters of credit to finance the purchase of farmer inputs from suppliers in Europe. These suppliers offer six months of credit at very low rates, allowing CRDB to effectively ‘import’ Europe’s low interestrate environment into Africa, he says. Introducing electronic payment solutions for farmers has also helped to reduce the bank’s costs.

 

Farmers too have a role to play. Warehousing relies on volumes to be economically viable, so farmer organisations need to strengthen their capacity for aggregation and collective marketing, says Gideon E Onumah, agricultural economist and rural finance specialist at the UK’s University of Greenwich.

 

Governments and central banks have a responsibility to manage fiscal policy to lower the cost of funding for financial institutions, says Samuel Ndonga at Kenya’s Chase Bank, which recently launched a warehouse receipt finance pilot. They also need to refrain from interventions such as artificially setting the price of certain crops that make warehouse receipt finance unworkable.

 

Chase Bank has so far lent around $1 million under its pilot, financing up to 65% of the value of produce being stored. So far, all loans disbursed have been repaid and it will evaluate the pilot in August to look at ways of expanding it.

 

A closer relationship between banks and collateral managers could also help reduce the risks – and therefore costs – of warehouse receipt finance, according to Onumah.

 

Despite its great potential, Africa’s collateral management industry is shrinking rather than growing, he says. Inspection companies are going out of business or limiting their activities to basic stock counting and quality checks, rather than providing a 360-degree service that actively safeguards stored produce against the elements, theft and fraud, he says.

 

Part of the problem is that newcomers struggle to secure professional indemnity insurance or, if they can, the costs are prohibitively high.

 

A bigger problem though is that banks are not rigorous enough about checking collateral managers are doing their job. While most banks follow the ‘know your customer’ mantra, “we say ‘don’t just look at the borrower. After looking at your client, look at the custodian’,” says Onumah.

 

Ultimately, regulatory systems need to be developed that provide proper oversight of collateral managers. Until that point though, banks need to take more responsibility for this themselves, he says. “The lack of specific warehouse legislation should not delay the development of this system.”

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