How Warehouse Receipts Can Improve Lives
Agriculture is the backbone of many economies in Africa, making up 25 percent of economic output.
In Kenya, it accounts for nearly 30 percent of the GDP and employs close to 75 percent of the population, mostly in smallholder agriculture. While agriculture remains a key economic sector and a key link to food security, only 5 percent of bank lending in Kenya goes to agribusiness.
Access to finance for smallholder farmers has the potential to transform agriculture in Kenya from subsistence and low-value activities into an innovative, commercially oriented, internationally competitive, and modern sector. However farmers, especially resource-poor smallholders, are often unattractive credit candidates for financial institutions because of the unpredictable, fragmented and unstructured nature of their agricultural activities.
The Warehouse Receipt System offers a solution. After harvesting, the farmer or trader can deposit a commodity in a certified warehouse and then be issued with a document of title called a warehouse receipt. The farmer or trader can then apply for short-term credit from a participating bank or other financial institution using the warehouse receipt as security for a loan, thus increasing access to finance for farmers.
For John Njenga, a farmer from Nakuru County, 100 km Northwest of Nairobi, the lessons learned from the warehouse receipts system are simple and essential. “With the credit we get, thanks to warehouse receipts, we buy certified seeds and fertilizer in time for planting season. As a result our produce has increased threefold per acre. The warehouse receipts system allows us to better organize our work and earn more money to take care of our families. It has truly transformed our lives”.
WRS reduces the pressure on the farmer to sell immediately after a harvest when prices are normally low. While the commodity is in the warehouse, the depositor can monitor the prices and sell when it is favorable, often resulting in a 35-40 percent increase in price. It allows sales to continue over time from one harvest to another, thus stabilizing prices. Importantly, the system drastically reduces post-harvest losses as the storage and care of the commodity is transferred to certified warehouses equipped with appropriate facilities and expertise to ensure quality and quantity. Warehouses in the WRS system have a post-harvest loss of 0.2 percent of commodities, while non-certified government-owned warehouses have a post-harvest loss of 30 percent.
MODEL COULD BE REPLICATED
The World Bank Group’s Kenya Agribusiness Investment Climate Program has advised on the drafting of the WRS legislation that can best enhance the structure of the sector and encourage bankers and insurers to further cover farmers, using commodities stocked in accredited warehouses as collateral. The bill has been approved by the Kenyan Cabinet and is now before Parliament for enactment.
Sarah Ochieng, who leads the Kenya Agribusiness Investment Climate Program, says: “A legal structure for a warehouse receipts system can provide the necessary credibility and predictability for financial institutions to increase their loans to farmers, which is likely to boost a critical sector for Kenya’s food security and economic growth. The World Bank Group is working on warehouse receipts in other parts of Africa. The lessons drawn from the successful Kenyan model can be replicated elsewhere in the region.”
Banks in Kenya are displaying interest to finance farmers through WRS. Chase Bank, one of the major investors in agribusiness in the country, committed more than $10 million to WRS financing for 2015. By February, half of it had already been disbursed. Esther Muiruri, the General Manager for Agribusiness at Equity Bank, the country’s leading bank in agribusiness financing, says: “For banks, a warehouse receipts system legal framework is a crucial step.”
“Warehouse receipts is certainly a game changer for agribusiness, but it needs to be implemented the right way,” says Gerald Masila, Executive Director of the East Africa Grain Council, an organization that promotes structured grain trading. Indeed, insufficient number of certified warehouses that comply with preservation norms, farmers’ limited business skills, and lack of incentives for millers to purchase WRS commodities are among the constraints limiting the expansion of WRS.
First Published: May 13, 2015
