review of warehouse receipt system and inventory credit initiatives in ...

sometimes experience losses through fraud, resulting for example from collusion between
their locally-hired staff, depositors and/or bank employees. In Africa, the values defrauded
have on occasions been in the tens of millions of dollars. Some industry players attribute this
to price competition in the industry causing players to cut their rates and not to invest
sufficiently in their own capacity (for example, hurriedly hiring and training staff to meet
upcoming storage contracts). Where losses do occur, collateral managers’ liability is
sometimes seriously limited by clauses in the storage contracts.
The problem for these companies is that if they claim against their professional liability
cover, this can seriously increase their insurance premiums. There are now reportedly only
two or three international reinsurance companies prepared to provide the required cover.
It is difficult to obtain statistics on the volume of the collateral management business, but the
volume of commodities handled is often substantial; for example “hundreds of thousand of
tonnes of agricultural products held annually in Zambia” according to anecdotal information.
However, apart from the problems described above there are some other limitations to the
scope and benefits from the CMAs, as follows:
• The main users are relatively large operators by standards of Eastern and Southern Africa,
companies that own or can rent entire warehouses or silos, and can afford fees costing
upwards of US$ 1,500 per month + cost of warehouse, packing materials, physical
handling and insurance which may be paid for separately by the client. Exceptionally, in
Tanzanian village-based microfinance-linked initiatives, collateral managers are
providing the basic service for as little as $900 per month.
• Collateral managers do not normally run public warehouses, where a number of different
players can deposit modest amounts of merchandise (e.g. 30 to 300 tonnes of maize) that
would not justify the expense of hiring a full warehouse and have it collaterally managed.
This public warehousing function can be more easily provided by trading entities
(privately or cooperatively owned) to which storage services provide additional revenue
over and above that provided by their core trading activity. This is something that
inspection companies cannot do, given the risk of compromising their neutrality in the
service business.
• The WRs are non-negotiable and cannot be used as delivery instruments against
contracts.
Given the importance of this activity and the problems associated with it, it is worth taking
steps to raise the level of professionalism and the guarantees provided. This is particularly
important as African owned companies try to fill the void left behind by the international
inspection companies. We return to this in the next section.
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