Weak law slowing warehouse receipting

By Sudi Wandabusi

The rolling out of warehouse receipting for agricultural produce by the National Cereals and Produce Board has sent a wave of excitement among maize farmers across the country.

Many agree that if well implemented, it is set to revolutionise the agricultural sector, save farmers from the conniving middlemen and help the country in improving food security.

A warehouse receipt is a document providing proof of ownership of commodities that are stored in a warehouse, depository, or vault for safekeeping. A warehouse receipt may either be non-negotiable, which only serves as mere proof of commodity ownership, or it may be in negotiable form, making it eligible to be used as collateral for loans.

A warehouse receipt also guarantees the existence and availability of a commodity of a particular quantity, type and quality in a storage facility named.

Regulated warehouse receipt systems have been touted as the solution to the persistent problems in agricultural marketing and credit systems in sub-Saharan Africa. A well functioning and regulated warehouse receipt system can simultaneously help make agricultural marketing more efficient and improve access to finance for farmers, individually and through co-operatives.

On the other hand, it also guarantees food security for the country, as farmers are encouraged to deposit their produce at government storage facilities. It is also argued that secure warehouse receipts can enable owners of inventory to borrow in currencies for which real interest rates are lower.

This is possible where loans are made against inventory of an export commodity like coffee in Kenya, where coffee stocks are often financed in pound sterling.

secure collateral

The first ever warehouse-receipting programme in Kenya was at the Nakuru Wheat Silos in April 2008 by the Eastern African Grain Council (EAGC), in conjunction with ACDI/VOCAÌs Kenya Maize Development Programme (KMDP) and USAIDS’ Regional Agricultural Trade Expansion Support (RATES).

So far, Equity Bank has embraced the development, issuing loans to farmers with warehouse receipts as collateral.

However, the lack of enabling legislation is militating against the development of this industry. Most farmers are yet to trust it and many would rather bare the cost of keeping the produce themselves.

Most of them feel there are no clear legal provisions on who bears the risk of loss; and the storage charges for the grains may escalate, especially as the Government does not guarantee the prompt purchase of the maize, only promising to give such farmers priority if and when the funds are available.

On the other hand, most banks have been reluctant to accept the warehouse receipts as sufficient collateral for loans, further curtailing the gains the arrangement promises.

The lack of an appropriate legal environment is the single most important barrier to the growth, creation and acceptance of warehouse receipts in Kenya. In order for a warehouse receipt system to be viable, the legal system must support the receipts as secure collateral.

The existence of a law that defines the parametres of warehouse receipt financing gives banks more latitude in adopting the appropriate policies and procedures for the development of lending and collateral-management strategies, as well as appeasing the banksÌ legal experts who have been reluctant to endorse this type of financing without a formal set of rules and regulations in place.

There is need for a law that clearly outlines the rights, liabilities, and duties of each party to a warehouse receipt Û the farmer, the bank, and the warehouse employee. It should provide for warehouse receipts that are freely transferable by delivery and endorsement.

Most importantly, the warehouse receipting law should clearly define collateral security issues and be made complementary to other statutes governing financing and the security interests of creditors.

Producers, traders and bankers also need maize pricing parametres in order to make appropriate credit decisions. Given the ever fluctuating maize prices across the year, there is need to come up with a simulation of reference prices based on historical pricing information, the closest regional trading markets offering prices for comparable maize qualities and quantities, and recent trends and demands from traders and buyers.

All this is only possible through an enactment of a law, with full participation of all stakeholders. A Warehouse Receipts Act is therefore long overdue in this country.