Agriculture & processing finance

Warehouse receipt financing feasibility study

September 27th, 2024

This study was jointly commissioned by Financial Sector Deepening (FSD) Kenya, AGRA, the Agricultural Finance Corporation (AFC) and the Warehouse Receipt System Council (WRSC). Its objective is to assess the demand-side, supply-side and environmental factors that affect the design and roll-out of a warehouse receipt financing product.

The study comes off the back of AFC’s 2018-2022 strategic plan, in which AFC set forth several business models it sought to implement to meet its strategic objectives, which included driving financial inclusion in the agriculture sector. Among the business models it set forth was the warehouse receipt financing model.

Kenya’s Warehouse Receipt System is nascent, having been established through the Warehouse Receipt System Act in 2019. The Act and its corresponding regulations, The Warehouse Receipt System Regulations, 2021, set out the legal and operational framework for developing, managing and regulating a warehouse receipt system for agricultural commodities produced in Kenya.

The Warehouse Receipt Systems Council (WRSC) is a State Corporation established under the Warehouse Receipt System Act, 2019 to facilitate the establishment, maintenance, development and regulation of the warehouse receipt system. The WRSC has the overall mandate of licensing warehouse operators and collateral managers, establishing and managing the Central Registry and providing general administration of the warehouse receipt system with efficiency, effectiveness and integrity.

As the adoption and use of the warehouse receipt system is still limited, and the system itself is developing, there is limited warehouse receipt financing are currently no warehouse receipt financing products offered by any financial service providers in the Kenyan market. Current warehouse receipt financing takes place for warehouse receipts issued by private warehouses outside the realms of the warehouse receipt system. with private collateral managers providing oversight of the deposited produce.

Prior to the establishment of the warehouse receipt system, a pilot of warehouse receipt financing was undertaken in 2014 by the Eastern Africa Grain Council (EAGC). The pilot saw four banks participate and a total of 49 warehouse-receipt-based-loans issued worth Kshs. 100 million. The underlying produce was stored across 10 warehouses weighed cumulatively 3,263 MT. Though the pilot was completed, it did not result in the adoption of this product by lenders in the market, and therefore it was also not taken up by farmers. A number of factors led to the lack of mainstreaming of this product in the financial services sector after the pilot. These include:

  1. Lack of oversight and supervision of participating warehouses
  2. Lack of regulatory environment that stipulates the conduct and obligation of warehouses
  3. A high cost of financing
  4. Lower than expected selling price of deposited produce when it is eventually sold
  5. High operational costs
  6. The capping of interest rates in 2016
  7. The collapse of Chase Bank in 2016

It has been six years since the conclusion of the previous warehouse receipt financing pilot. A number of contextual changes have taken place that affect the feasibility and viability of a warehouse receipt system financing solution.

Among them are the recent enactment of a legal and regulatory framework establishing the warehouse receipt system and setting out a clear oversight and supervision framework. This is expected to lower the operational costs faced by financiers in monitoring and securing deposited produce pledged as collateral. Secondly, since Agricultural Finance Corporation (AFC), a government-owned development finance institution, has the mandate to contribute to the development of agriculture and is able to access long-term wholesale finance at below market costs, it is better placed to ‘test the waters’ and determine the viability and feasibility of a warehouse receipt financing product. The rest of this summary presents the key findings from the demand, supply and enabling environment analysis as well as the proposed warehouse receipt loan product design.

Click here for the full Warehouse receipt financing feasibility study report

 

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