Warehouse receipt financing has been promoted by many development economists and practitioners as a common-sense solution to one of the most fundamental marketing challenges faced by poor agricultural producers in the developing world.

The primary argument is that smallholder farmers lack access to affordable credit and dependable storage facilities, as a result are unfairly forced to sell their surplus at harvest when prices are generally at their lowest.

The Ghana Commodity Exchange (GCX) has signed a memorandum of understanding with the ARB Apex Bank to help channel loans to farmers using their commodities deposited at GCX-certified warehouses as collateral.

Warehouse receipt financing has been promoted by many development economists and practitioners as a common-sense solution to one of the most fundamental marketing challenges faced by poor agricultural producers in the developing world.

The primary argument is that smallholder farmers lack access to affordable credit and dependable storage facilities, as a result are unfairly forced to sell their surplus at harvest when prices are generally at their lowest.

GCX resolves price issues

The GCX warehouse receipt financing allows smallholder farmers to store their surplus safely in a GCX-certified warehouse, to sell at a later date when prices are higher, while allowing them to use the stored commodity as collateral to secure a loan to finance household consumption and investment needs in the interim.

The operations of the GCX solves numerous problems that have confronted Ghanaian farmers and their markets for years; problems ranging from post-harvest losses, sale of unstandardised commodities, being price-takers, delayed payment for commodities sold and inability to access credit due to collaterals demanded from banks.

ARB Apex Bank is the first partner bank of GCX to have facilitated loans to farmers using their commodities stored at a GCX certified warehouse as collateral.

The two partners estimate that about 200,000 farmers will benefit from the novel product in the first year, with room for upscaling significantly once concept takes root.

Signing

The Chief Executive Officer (CEO) of GCX, Dr Kadri Alfah, after the signing in Accra yesterday, said “To achieve the goal of true development of the agricultural value chain and improve the lives of rural communities, greater access to financing and a diverse set of credit facilities is critical.

That, he said, would give Ghanaian farmers the working capital they need to sustain their business activities in between each harvesting season as well as give them greater purchasing power for seeds, fertilisers and other inputs.

He said even though the rural and community banks (RCBs) had been lending to the agricultural sector, the collaboration provided an opportunity for the banks to scale up and lend to more farmers since the risk in the system was nearly eliminated, the CEO of ARB Apex Bank, Mr Kojo Mattah, said.

The Director of the Ashanti Regional Coordinating Council, Mr Ebenezer Ntow Ayisi, who was at the signing, added that; “The innovations on offer from the GCX can indeed only be described as providing a totally different future for agriculture in Ghana….A future where farmers and buyers have the opportunity to apply grading standards to their produce, obtain suitable prices for their wares and now a future where farmers can go into banks to obtain loans.”

Background

A release after the signing said the exchange encouraged banks and other financial institutions to participate in warehouse receipt financing because it offered the opportunity to minimise the risk of loss of value of the collateral (stored commodity) by monitoring movements in its market value and using margining and price risk management instruments with up-to-date market data analysis and notifications.

According to the GCX, loss of value was further minimised due to the structured regular inspection carried out by a Food and Drugs Authority (FDA)-approved GCX warehouse operator to ensure that the stored commodity retained its value.

The release added that while warehouse receipt financing could usher in a sea change in the agribusiness sector of developing countries, most of whom have agriculture as a vital part of the economy, it needed to be implemented the right way and with the appropriate structures in place to provide the utmost value.