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

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sometimes experience losses through fraud, result<strong>in</strong>g for example from collusion between<br />

their locally-hired staff, depositors <strong>and</strong>/or bank employees. In Africa, the values defrauded<br />

have on occasions been <strong>in</strong> the tens <strong>of</strong> millions <strong>of</strong> dollars. Some <strong>in</strong>dustry players attribute this<br />

to price competition <strong>in</strong> the <strong>in</strong>dustry caus<strong>in</strong>g players to cut their rates <strong>and</strong> not to <strong>in</strong>vest<br />

sufficiently <strong>in</strong> their own capacity (for example, hurriedly hir<strong>in</strong>g <strong>and</strong> tra<strong>in</strong><strong>in</strong>g staff to meet<br />

upcom<strong>in</strong>g storage contracts). Where losses do occur, collateral managers’ liability is<br />

sometimes seriously limited by clauses <strong>in</strong> the storage contracts.<br />

The problem for these companies is that if they claim aga<strong>in</strong>st their pr<strong>of</strong>essional liability<br />

cover, this can seriously <strong>in</strong>crease their <strong>in</strong>surance premiums. There are now reportedly only<br />

two or three <strong>in</strong>ternational re<strong>in</strong>surance companies prepared to provide the required cover.<br />

It is difficult to obta<strong>in</strong> statistics on the volume <strong>of</strong> the collateral management bus<strong>in</strong>ess, but the<br />

volume <strong>of</strong> commodities h<strong>and</strong>led is <strong>of</strong>ten substantial; for example “hundreds <strong>of</strong> thous<strong>and</strong> <strong>of</strong><br />

tonnes <strong>of</strong> agricultural products held annually <strong>in</strong> Zambia” accord<strong>in</strong>g to anecdotal <strong>in</strong>formation.<br />

However, apart from the problems described above there are some other limitations to the<br />

scope <strong>and</strong> benefits from the CMAs, as follows:<br />

• The ma<strong>in</strong> users are relatively large operators by st<strong>and</strong>ards <strong>of</strong> Eastern <strong>and</strong> Southern Africa,<br />

companies that own or can rent entire <strong>warehouse</strong>s or silos, <strong>and</strong> can afford fees cost<strong>in</strong>g<br />

upwards <strong>of</strong> US$ 1,500 per month + cost <strong>of</strong> <strong>warehouse</strong>, pack<strong>in</strong>g materials, physical<br />

h<strong>and</strong>l<strong>in</strong>g <strong>and</strong> <strong>in</strong>surance which may be paid for separately by the client. Exceptionally, <strong>in</strong><br />

Tanzanian village-based micr<strong>of</strong><strong>in</strong>ance-l<strong>in</strong>ked <strong><strong>in</strong>itiatives</strong>, collateral managers are<br />

provid<strong>in</strong>g the basic service for as little as $900 per month.<br />

• Collateral managers do not normally run public <strong>warehouse</strong>s, where a number <strong>of</strong> different<br />

players can deposit modest amounts <strong>of</strong> merch<strong>and</strong>ise (e.g. 30 to 300 tonnes <strong>of</strong> maize) that<br />

would not justify the expense <strong>of</strong> hir<strong>in</strong>g a full <strong>warehouse</strong> <strong>and</strong> have it collaterally managed.<br />

This public warehous<strong>in</strong>g function can be more easily provided by trad<strong>in</strong>g entities<br />

(privately or cooperatively owned) to which storage services provide additional revenue<br />

over <strong>and</strong> above that provided by their core trad<strong>in</strong>g activity. This is someth<strong>in</strong>g that<br />

<strong>in</strong>spection companies cannot do, given the risk <strong>of</strong> compromis<strong>in</strong>g their neutrality <strong>in</strong> the<br />

service bus<strong>in</strong>ess.<br />

• The WRs are non-negotiable <strong>and</strong> cannot be used as delivery <strong>in</strong>struments aga<strong>in</strong>st<br />

contracts.<br />

Given the importance <strong>of</strong> this activity <strong>and</strong> the problems associated with it, it is worth tak<strong>in</strong>g<br />

steps to raise the level <strong>of</strong> pr<strong>of</strong>essionalism <strong>and</strong> the guarantees provided. This is particularly<br />

important as African owned companies try to fill the void left beh<strong>in</strong>d by the <strong>in</strong>ternational<br />

<strong>in</strong>spection companies. We return to this <strong>in</strong> the next section.<br />

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