August 26th, 2024

Financial Sector Deepening (FSD) Kenya, The Agricultural Finance Corporation (AFC), Warehouse Receipt System Council (WRSC), and AGRA, disseminated the findings from the recently conducted feasibility study on warehouse receipt financing in Kenya.

The study on warehouse receipt financing in Kenya aimed to assess the demand-side, supply-side and environmental factors to support the design and roll-out of a warehouse receipt financing solution by the Agricultural Finance Corporation (AFC), supported by the Warehouse Receipt System Council of Kenya (WRSC).

The study comes off the back of the corporation’s 2018 – 2022 strategic plan and is aligned with its current strategic plan 2023-2027, both of which envisage new business models for AFC – including roll-out of a warehouse receipt financing model.

The Agricultural Finance Corporation has historically required land collateral as a security to facilitate disbursement of loans to farmers and MSEs seeking finance solutions for Agriculture in a bid to safeguard taxpayers’ money. This has primarily been title deeds. In a county where women own land disproportionately to men, the implication is that women farmers and MSEs are unequally treated due to a lack of “hard” collateral, and/or “right” collateral.

Coupled with the price fluctuations characterising Kenya’s smallholder driven agricultural sector, a majority of these farmers continue to be price takers.  They are unable to access financing against the commodities they produce.

Aggregation of produce by smallholder farmers, logistics like transport and drying of produce for non-organised farmers is also often, difficult, resulting in post-harvest losses now estimated at over 50% of total harvest. The ability of smallholder farmers to sell their produce after warehousing, is also a challenge but might be possible with additional support on aggregation and market coordination. Servicing many unorganised smallholder farmers requires thorough coordination of all upstream and downstream value chain actors. Exacerbated by a lack of a robust system to enhance this interaction and flow of finance, the development of the warehouse receipt system and financing has been elusive.

Summary of findings

1. Smallholders have a single harvest per year with output per harvest is less than 5T. In maize for instance, 99% of farmers reached during this study harvested only once per year with only 16% harvesting more than 5T p.a.
2. Proportion produce stored varies per value chain with most smallholders opting to sell their harvest at harvest. 56% of rice farmers store at least 25% of their produce. Maize farmers store between 25% to 10% of their harvest while coffee farmers sell all their produce at harvest. The major incentive to store is for family consumption. Also most farmers store produce on their farm
3. Most smallholders store food in a warehouse to aid in price discovery (51%) and to lengthen their shelf life (53%). Cost, non-familiarity and logistical difficulties have been raised as the main reasons for not storing in a warehouse.
4. The Warehouse Receipt System is not well known among most smallholders. Upon sensitisation, most farmers still preferred to store their produce independently. The main reasons for interest in the warehouse receipt system are safety and security of produce; access to financing options and achieving a better price for produce, by riding the high supply season. The main reasons for a lack of interest are the flexibility that comes with independent storage being valued greatly and having alternative storage.
5. Intervening at the cooperative level with a warehouse receipt finance solution is preferable delivery channel. There is greater awareness of the WRS and its potential benefits and challenges.
6. Financial inclusion is impressive among smallholders sampled by this study. Formal account ownership is high with most smallholders having access to finance through a mobile money agent (85%).
7. A lack of sufficient collateral and low-ticket financing requirements (KShs. 50-100k) are cited as a major impediment to access to finance. With an expanded digital financial service space in Kenya, smallholders have a multitude of choices to pick from – although post-harvest finance solutions are limited.
8. AFC has the trust and confidence of farmers and stakeholders and is uniquely positioned to roll out a warehouse receipt backed finance solution. Collaboration between depositors, warehouse operators, financiers is necessary to successfully deploy an applicable solution.
9. There is an enabling environment for a warehouse receipt solution to be implemented with a few areas for remedy. Ambiguity and inefficiencies might arise from an overlap of the Movable Property Security Rights Act, 2017 and the Warehouse Receipt System Act, 2019, which needs to be addressed.

In conclusion, the warehouse receipt system is still nascent in Kenya with limited supply of certified warehouses. There is also a somewhat limited track record or trust in the use of these warehouses by farmers and financiers. Nonetheless, there is significant available warehousing capital that can be transformed to certified warehouses support by the current legal framework provided by the enacted Warehouse Receipt System Act, 2019. Lessons can also be drawn from Kenya’s Financial Institution’s previous experience of developing warehouse receipt backed financing solutions that was not without challenges. Unless we get this right, farmers will continue to be price takers.

As a market maker, AFC will be instrumental in piloting warehouse receipt backed financial products for farmers and for other financial service providers to adopt.

Summary – Warehouse receipt financing feasibility study key insights and findings

Full report –  Warehouse receipt financing feasibility study

 

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