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

grain traders) into formal players who can either purchase the crop from the farmer outright,
sell it on his/her behalf (e.g. through an exchange broker) and/or store it for a fee for later sale
or consumption, all this to happen under a rule-based/regulated system. This is part of a
longer-term strategy of gradually developing ‘local trade hubs’ which provide a diverse range
of services to the local farming community, including input supply, marketing, storage,
financial services and insurance. The projects supporting this approach will select
intermediaries with a strong track record, and who enjoy widespread confidence in the
communities concerned. They may receive support in developing their storage infrastructure,
and banks will provide inventory credit against the stocks held in the warehouse, the first step
in the establishment of a fully-fledged warehouse receipt system.
The approach seeks to build on the strength and local knowledge of existing intermediaries
who already enjoy the trust of farmers in their respective locations, by increasing their
expertise, diversifying their functions and developing their asset base. In countries like
Malawi, this may provide a long-term route to the establishment of the regulated WRS.
However, the details of the “Grain Bulking Centres” project have still to be worked out, and
it will require a supervisory system that may prove costly in relation to the small volumes of
produce handled. The project will need a much longer time horizon than the two years
budgeted for it, and lean supervisory arrangements that allow for an eventual exit strategy.
Approach 2: private warehousing
Given the importance of collateral management, and the issues discussed in Chapter 3, it is
worth taking steps to raise the level of professionalism and the guarantees provided. This
might be done in various ways including training schemes, codes of conduct, national-level
regulatory arrangements and/or some system of international accreditation (backed up by spot
checks).
A radical innovation is for WRS regulatory agencies to license trading or processing
companies to issue warehouse receipts against their own stock, without recourse to a
collateral manager and without any obligation to hold stocks for third parties. Private
companies in both Kenya and Uganda have approached their respective regulators (EAGC or
UCE) with this intention. This approach would allow these players to issue warehouse
receipts against their own stock for the purpose of raising bank financing, and also of
transferring title to buyers. Potentially this could increase market efficiency, to the benefit of
both farmers and consumers at either ends of the chain. It could help establish a more level
playing field among trading companies, making it easier for local operators to access low cost
capital. It is moreover a sort of self-propelling innovation, building on the motivations of the
proposing company.
It is however quite a risky approach, where the regulator has little direct control over the
actions of the licensee, who may move stocks around without the knowledge of a regulator
who is not on site. Moreover, if such a warehouse operator goes bankrupt, it may also be
difficult for the bank to prevent priority being given to other creditors. Such a system will
require careful analysis of the legal issues, and a very rigorous set of guarantees and oversight
mechanism. However trading companies that operate as public warehouses have similar
opportunities to abuse the system, and in this case it may be at the expense of third party
depositors. This observation underscores the importance of establishing very rigorous
regulatory mechanisms from the outset. Following American practice the regulator should
check all types of stock held including those third party stocks represented by warehouse
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