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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:
- 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.
- 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.
- 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.
- 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.
The Egyptian Exchange (EGX) is the oldest in the Middle East and North Africa region and one with a fascinating history of development, having gone through nationalisation in the 1950s and having been revitalised only in the early 1990s. The passage of the Capital Markets Law in 1992 and the introduction of the Asset Management Programme in 1994, which facilitated disposal of government stakes, were key to the revitalization of the Exchange. While the number of listed companies peaked at 1100 in 2001 with market capitalisation of $24 billion USD, the market remained illiquid and lacked transparency.
Eventually, in order to bring liquidity and improve market quality, over 800 companies were delisted by 2005 for failing to meet regulatory requirements. In an effort to bring further transparency to the market, the Egyptian regulator introduced a voluntary corporate governance code for listed companies in 2005, and some of its recommendations were eventually transcribed in the listing requirements of the EGX. Over the years, enforcement activity has grown and in 2014, the Exchange started to publish all violations on its website and through the trading terminals.
Yet, substantially improving governance practices in listed companies remains a challenge due to the low levels of participation of institutional investors in the capital market. While only 15% of market capitalisation remains in the hands of retail investors, they account for close to 80% of trading, similarly to other MENA markets. Furthermore, institutional investors, both domestic and foreign, remain rather passive unlike in developed markets where, especially following the financial crisis, the expectations and stewardship responsibilities placed on institutional investors have been growing (e.g. the Stewardship Code in the UK).
The lack of engagement by domestic investors can be explained by the type of institutional capital present in equity markets, notably state-owned pension funds and insurance companies which continue to hold sizeable stakes in the market, having "inherited" them following the nationalisation programme. Their investment decisions are delegated to investment committees composed of the executive management and board members whose investment approach is usually characterised by conservatism and scepticism of capital markets. In addition, limits for capital market investment by pension funds and insurance companies are below international standards.
On the other hand, foreign investors' passivity can be explained by a number of factors, including their relatively small stakes in listed companies - most as part of an Emerging Market Index investing - leading to a lack of incentives for them to engage. In addition, recent years have seen an outflow of foreign capital and reduced activity by foreigner investors due to political instability, as well as hurdles in profit repatriation and foreign currency scarcity. As a result, foreign institutional investment dropped to 36% of the total market capitalisation.
In a forthcoming report on exploring the participation of institutional investors in the Egyptian capital market, we put forth recommendations on encouraging institutional investors and especially sovereign investors such as pension funds and insurance companies to act in their stewardship capacity. Doing so would yield positive results both for the state as their ultimate owner, for the general public which is the beneficiary of their services, as well as for improving the quality of the governance of listed companies.
We propose obliging certain categories of institutional investors to develop voting policies and vote their shares. This was already implemented in some countries such as Chile, specifically for the pension funds, with positive results. In addition, we propose that the Egyptian Capital Market Association (ECMA) and the Egyptian Investment Management Association (EIMA) be used as a platform to introduce self-regulatory standards for institutional investors.
*The views express in this post do not represent the official views of the OECD or its member countries.
Further recommendations and analysis is presented in the study The Role of Institutional Investors in the Egyptian Capital Market.
About the Authors
Maged Shawky Sourial is the CEO of Beltone Financial Holding since 2012, and Chairman of Beltone Exchange Traded Fund Company. Mr. Sourial is the Ex-Chairman of The Egyptian Stock Exchange since July 2005 till July 2010 after being the Deputy for the chairman for almost a year. During the period of 2002 till mid 2004, he represented the Regulator (Capital Market Authority) in the board of directors of the Exchange for three years. He held the position of Senior Assistant to the Minister of Economy and Foreign Trade for Securities Markets issues for around 12 years since 1995. He holds a Masters Degree in Financial Economics from Queen Mary, University of London, United Kingdom.
Alissa Amico is responsible for overseeing OECD's work on financial markets and corporate governance in the Middle East and North Africa. Alissa joined the OECD in 2005 to establish a regional programme on private sector development in the MENA region with the relevant Ministers in the region. In this capacity, Alissa provided technical support to a number of governments in the region the design of regulatory initiatives and institution building. Alissa holds a Bachelors degree in Business Administration from the Schulich School of Business, York University (Canada) and a Masters degree in Political Economy with a specialisation in the Middle East from the London School of Economics and Political Science (UK). She is a member of the French Institute of Directors' International Commission, and was named one of the Top 100 Leaders in Europe and the Middle East by the Centre for Sustainability and Excellence in 2011 and was recognised by Columbia Law School as the Rising Star of Corporate Governance in 2014.