April 17th, 2025

Findings from FinAccess household survey 2024 reveal that smallholder farmers (“SHFs”) in Kenya still have limited access to affordable and applicable formal credit necessary to finance the volume of inputs necessary to achieve maximum yields. In fact, on average, because of insufficient inputs, maize yields for smallholders are approximately half the farm’s carrying capacity. Additionally, FinAccess 2024 results show a reduced ability of smallholders in Kenya to invest in their futures (figure 1). This, coupled with a stark lack of flexibility necessary to sell their harvests when prices are at their highest, contributes significantly to reduced farm income and deteriorating financial health outcomes. 

---

---

Does warehouse receipt financing¹ provide a viable means of enhancing financial health of smallholder women farmers? 

Lack of collateral is but one example of several barriers faced by Kenya’s ​​SMEs – particularly, women-led microenterprises and smallholder farmers – who often lack landed collateral. This inexplicably leads to difficulties accessing ​working capital ​finance. Can warehouse receipt finance play a role in remedying this situation? A warehouse receipt loan offers an alternative to finance the working capital required by SHFs. Using standard underwriting policies and credit procedures used by commercial financial institutions, a warehouse receipt credit should establish that SHFs have sufficient financial strength to repay their obligations, without relying on the value of collateral as the primary source of repayment.​​  

Historically, warehouse receipt financing has been limited to larger farming operations, traders and aggregators, where harvested volumes pledged as collateral are larger. This is largely due to the perception that larger borrowers are more creditworthy, without necessarily relying on the value of the collateral as a source of repayment.   

Warehouse receipt financing allows those with access to this type of financing to:  

1. Participate in price discovery and sell their harvest at the highest price.   

1. ​​​Buy the harvest of SHFs at or near the harvest, when prices are lowest, and then wait to sell at the highest price.  

As a result, smallholder farmers have access to working capital needed to finance their next farming cycle, allowing them to hold their harvest while waiting for favourable market prices before eventually selling. In effect, because smallholders have hitherto been unable to access warehouse receipt financing, they give up substantial benefits from their labors to those with the financial capacity to off take their harvest at the lowest price, in acting as price takers. 

---

---

What opportunities does warehouse receipt present for women smallholders and MSEs? 

FSD Kenya, ​the ​FSD Network​ and​ Hello Tractor​,​ supported by the Warehouse Receipt System Council​,​ are piloting ​a ​warehouse receipt financing solution directed exclusively smallholders in Kenya​ with an explicit focus on ensuring that the solutions also benefit ​women​ SHF​.  This pilot follows a feasibility study on warehouse receipt lending in Kenya commissioned by FSD Kenya in 2023  that assessed the demand-side, supply-side and environmental factors that affect the design and roll-out of a warehouse receipt financing solution in Kenya. The opportunities are threefold: 

1. Establishing that warehouse receipt financing is a viable option for smallholders ​(​including women​)​ to obtain credit and, at the same time, a profitable opportunity for financial institutions.  
2. That smallholders have sufficient credit to ensure repayment, independent of the value of the collateral that the SHF is pledging to the lender.  
3. There is a compelling economic benefit to smallholders resulting from the increased flexibility derived from selling their harvest at the highest price, usually 6 months after the harvest takes place.  

The success of this pilot will not only improve access to credit and enhance financial health for smallholders. It is positioned to also enhance broader understanding within the financial services sector ​​of the opportunity of extending commercial credit to smallholders and micro and small business segments, in addition to improving the flexibility of off take especially during highest price seasons. It is hoped that the success of this pilot will establish that extending short-term credit secured by a double warehouse certificate is a viable and profitable pathway for commercial banks.   

Furthermore, there’s an opportunity for warehouse receipt finance credit and underwriting policies ​​emphasising the borrower’s ability to repay over the value of the collateral, will take precedence when financing women smallholders and MSEs throughout Kenya. Presently, the pilot has attracted a strong uptake from smallholder farmers, many of whom have pledged their warehouse receipts for financing. There’s a record of pledged commodity being sold with 26% profit for a smallholder, capitalising on the price discovery mechanism it allows for.  

Treatment of collateral as the primary source of repayment: A Bad Idea? 

As alluded​ to ​​​earlier, warehouse receipt finance is often mischaracterised as an avoidance avenue for lenders to assess the underlying credit of the borrower, with the sale of the collateral being considered as the primary source of repayment rather than the cash flow of the borrower.   This approach primarily emphasises on the collateral​​, and not the borrower’s ability to repay independently of the value of the collateral – which is a bad idea! Treating the collateral as the primary source of repayment, rather than the credit strength of the borrower, violates basic principles of lending.  This approach to underwriting often results in an increase in non-performing loans and leases, with the lender losing all or part of its principal.   The reason – there is little, or no attention paid to the ability of the borrower to repay the obligation. Consequently, ​commercial​ loan losses among SMEs often reduce credit availability to small and medium enterprises of all types, including smallholders. Smallholders’ ability to lever sufficient credit strength to repay their obligations without relying on the sale of the collateral should take precedence in making credit decisions. While ideally a warehouse receipt loan will be repaid out of the proceeds from sales of the produce, the lender needs to be assured that the credit strength of the borrower is sufficient to repay the loan, independently of the sale of the collateral. 

What does this entail?  A simple credit process designed to help establish the ability of the smallholder to repay the loan, independent of the value of collateral that is specified in the warehouse receipt.  The credit process includes the following elements: 

1. An application that is easy to complete that incorporates all the information on which to base a credit decision. 
2. A credit matrix where the borrower’s information included in the application is incorporated, and it is designed to simplify the cost of underwriting to the lender, critical given the relatively small loan size, and yield quick credit decisions.  
3. A policy that requires, where the borrower consists of husband and wife, that all spouses sign the loan agreement, with the spouse acknowledging both the existence of the loan and its terms and conditions. 

Approximately 67% of the time, male farmers tend to make decisions alone without spousal input on how farm income is spent (Figure 3). As such, spousal consent is key to ​the ​success of this solution for smallholders. It acknowledges the key role women play, not only in the success of smallholder farming, but in MSE growth, generally where the business is owned and operated by both spouses. 

---

---

Next steps… 

Having developed a gender intentional short-term post-harvest loan product with a double warehouse certificate as collateral in 2024, the focus now shifts to assessing the interests of commercial banks in Kenya in extending short-term credit to SHFs (in partnership with Hello Tractor). This will also cover refinement of all necessary documentation, including the application, credit standards and credit agreement, ensuring these are simple to use and consistent with standard policies and procedures found in Kenya’s financial market.

TAGS

CATEGORIES