Can warehouse receipts unlock farmer finance?

Accessing finance remains obstacle to agricultural growth in emerging markets, hindering farmers from improving productivity and escaping poverty.  Less than 3% of credit provided by formal financial institutions in emerging markets is allocated to agriculture.

The lack of collateral is one of the main constraints to accessing finance for agriculture.  Farmers, particularly smallholder farmers, often lack assets to secure finance.  While crops can be considered as an asset used as collateral by financial institutions, a system is needed under which this can happen. This requires crops to be securely stored in a licensed facility, managed by licensed managers, and protected by a suitable legal and regulatory framework—this is the basis of a warehouse receipt system.
 

Benefits of warehouse receipt systems

A warehouse receipt system (WRS) goes beyond allowing crops to be used as collateral for loans.  It improves post-harvest prices and reduces losses due to inadequate storage facilities.  Many farmers have no option other than selling their crops to local traders soon after harvest, thereby failing to exploit favorable price movements over the full crop season.  Most commodity prices rise after harvest, but a farmer selling at harvest tends to get the lowest seasonal crop price.  With warehouse receipts farmers have the option to store their crops in warehouses after harvest rather than selling their entire crop production immediately.

Smallholder farmers not only contend with imperfectly competitive crop markets, but also face significant losses due to inadequate storage facilities. Reports indicate that between 30–40% of harvested crops can be lost because of poor storage conditions.
 

How warehouse receipt systems work

A regulated WRS with collateral management offers small and medium farmers and agri-businesses in emerging markets a solution to access finance. WRS is a method of inventory financing, enabling farmers, traders, and processors to deposit their crops in a certified warehouse and receive a receipt as evidence that the specified commodities, of a stated quantity and quality, have been deposited. The warehouse receipt can be used as collateral for a bank loan. The depositor can use the loan to finance their operations without the need to sell their crops immediately after harvest and while waiting for post-harvest prices to improve.
 

Global adoption and scaling challenges

Warehouse receipt systems are not new, although their popularity is still rather limited in many emerging markets, particularly lower income ones. In several emerging economies, besides pilot projects, scaling up has been challenging due to:

• lack of awareness among many stakeholders (especially farmers),
• lack of relevant legal and regulatory frameworks to protect lending,
• lack of knowledge on the part of the banks to finance warehouse receipts, and
• lack of suitable warehouses and warehouse management services.

With financial support from donors such as the Swiss State Secretariat for Economic Affairs (SECO), programmatic activities are available to fill these gaps and make warehouse receipts—hence access to finance—available on a much larger scale in countries such as Ghana and Colombia.
 

Ghana success story

In Ghana, a SECO-funded project promoting the use of warehouse receipts has resulted in 2,113 smallholder farmers and small and medium enterprises receiving $584,837 from participating financial institutions, with zero recorded defaults. In 2022, the project successfully launched warehouse receipt financing with four well-performing savings and loan companies, introducing a new line of business and expanding the range of financial institutions available to finance farmers using warehouse receipts. Furthermore, 32 rural and community banks have recently been integrated into the Ghana Commodity Exchange (GCX) e-WRS trading system to deliver warehouse receipt financing products for smallholders, aggregators, and traders. Farmers have benefited from improvements in grain handling and storage practices, better storage facilities, access to an organized market via the GCX, and access to pricing and market information.   For example, several farmers from Sandema in Ghana’s Upper-East region, used to store their grains in their home, leading to spoilage and mold, which lost them money.  Through the SECO funded project, they adopted improved post-harvest practices and stored their grains in a warehouse, they were able to reduce quality losses and achieve higher prices and income.
 

Additional Benefits

The benefits of warehouse receipts reach beyond smallholder farmers to all stakeholders along a crop value chain.  Financial institutions, for example, can expand their reach, achieving greater financial inclusion at a lower risk. A general manager of a community bank in Sandema, Ghana, credits the warehouse receipt system as presenting new opportunities to sell financial products and services to more customers. 

Finally, an important point is that warehouse receipts have the potential to deliver environmental benefits. A WRS requires commodities to be stored in suitable, licensed, and inspected warehouse facilities that can substantially reduce food losses compared to informal storage, particularly near farms. Food losses due to improper storage are one of the main sources of greenhouse gas emissions (GHG) in agriculture, with food loss and waste accounting for about 8% of overall GHG emissions.

Warehouse receipt financing is a secured/movable asset-based lending technique that allows farmers and agri businesses access to finance secured by commodities deposited in warehouses. It is especially beneficial for farmers and small and medium enterprises, which are often unable to secure borrowing requirements due to lack of sufficient conventional loan collateral.

Source: blogs.worldbank.org