Maize farms at Wei Wei irrigation scheme in Sigor, West Pokot County on September, 2022. The scheme is slowly changing the income of residents since its establishment. [Christopher Kipsang, Standard]

Uasin Gishu, Nakuru, and Trans Nzoia are the three counties where the government will pilot a commodity-based financing model targeting farmers, aiming to increase credit uptake.

The warehouse receipt financing model, which has already undergone a feasibility study, will enable farmers to access credit from financial institutions using their produce as collateral.

This financing model seeks not only to make credit accessible to farmers, especially smallholders, but also to ensure they maximize their profits.

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The Warehouse Receipt System Council (WRSC) and the Agricultural Finance Corporation (AFC) are some of the institutions that will participate in the pilot and the subsequent rollout. Interested banks will also be included.

The study that informed the potential of this product, published by Financial Sector Deepening (FSD) Kenya, found that most smallholder farmers' financial needs range between Ksh50,000 and Ksh100,000.

The study documents that price discovery and lengthening shelf life, at 51% and 53 per cent respectively, are the top reasons smallholder farmers would store their food in a warehouse.

“The Warehouse Receipt System (WRS) is not well known among most smallholders,” the study found. “Even after sensitization, most farmers still preferred to store their produce independently.”



Tamara Cook, FSD Kenya Chief Executive, said the percentage of loans advanced to farmers in the country is low, averaging at 3.3 per cent.

She noted that considering how vast smallholder farming is, it could be that much of the salary loans are taken to fund these activities.

“There is a clear opportunity to lend in double digits to the agricultural sector. Leveraging warehouse financing could be one of the ways to reach that double-digit bank lending for banks and even SACCOs,” she said.

Lucy Komen, Warehouse Receipt System Council (WRSC) Registrar & Chief Executive, noted the need for a cultural shift among smallholder farmers. She emphasized the goal of moving them from being price-takers to becoming negotiators of their commodities.

“You cannot have collateral if that produce is in your store or house,” she said.



She added that for this product to work well, there is a need for aggregation to give farmers bargaining power and standardization of commodities.

“It is one thing to aggregate and another to have quality standardized products,” she said.

WRSC is the body that will issue farmers or traders with commodities in certified warehouses with a copy of the electronic receipt against which a facility can be taken. Financial institutions are expected to have access to the database of these receipts for verification.

George Kubai, Managing Director of the Agricultural Finance Corporation (AFC), confirmed the disadvantage women face, citing it as an issue in the advances the institution makes to farmers.

He described these as inefficiencies that lock out both youth and women in the trade, adding that AFC is working to tilt the scale.

“The warehouse receipt financing product is a crucial part of this strategy,” he said.

He explained that over the years, AFC has been lending using hard collateral in an effort to safeguard taxpayer investment. As a result, the institution has primarily loaned to men, with less than five per cent of the funding going to women and youth.

“This data has troubled AFC, and it is the basis upon which we are trying to rethink,” said Mr Kubai.

He pointed out that the warehouse receipt loan product will solve the challenge of price fluctuations, which he noted affects farmers’ profits. Such a service will eliminate the need for the immediate sale of produce.

Accessing a loan using the warehouse receipt, he said, will allow farmers to handle their immediate needs as they wait for better prices.

“The markets in this country are dominated by brokers. The moment you step into the market, even though you are the owner of the produce, it is not you who will negotiate the price. The brokers take over your cargo and dictate the market,” he said. “This is one of the challenges we need to address through the warehouse receipt financing so that our farmers are empowered.”

Dr. Kiprono Rono, Principal Secretary of the State Department for Agriculture, said the sector contributes an average of 25 per cent to the country’s Gross Domestic Product (GDP), making it a key economic activity, particularly for rural Kenya.

“Approximately 40 per cent of our population relies on agriculture, hence investing in this sector is a necessity to ensure its growth and sustainability,” he said.

He added that the country’s smallholder farmers face significant challenges, including financing, and the government supports the implementation of this novel product.

“The receipt you receive is not just a document but a valuable asset that can be used as collateral to access affordable credit facilities from participating financial institutions. This system is designed to empower farmers and provide them with the necessary tools to thrive,” said Dr. Rono.

He noted that AFC, which is a state agency, is a participant, as is the National Cereals and Produce Board (NCPB), which has a range of certified warehouses across the country.

“It is a testament to the potential it has,” he said.

However, for this model of financing to be beneficial to farmers, Amb. Phyllis Kandie, an advisor to President William Ruto on commodities markets in the Council of Economic Advisors, emphasized the importance of a commodity market exchange.

She said this would complete the value chain with spot and future markets in place. A spot market would address farmers’ immediate needs if they need to sell, while the future market would ensure they only sell when the price is right.

Ms. Kandie, a former Trade Cabinet Secretary, said having a commodity market exchange would also give confidence to financial institutions.

“It is important we have an exchange because it completes the value chain. An exchange will have a pool effect, and farmers can lock in their future contracts because they are assured of a market,” she said.

She added, “This de-risks the whole process, not only for the farmers but also for the traders, banks, and warehouse operators.”