Bill Operationalises Long-Awaited Warehouse Receipt System

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A bill proposes the formation of a regulatory body that will oversee the implementation of a warehouse receipt system that facilitates credit for farmers depositing storable goods in exchange for a warehouse receipt.

The regulation was drafted by the Ministry of Trade & Industry in collaboration with the International Finance Corporation, a member of the World Bank Group that advises on private sector development. The regulatory body will be established under the Ministry and be tasked with supervising the development of the warehouse receipt system and issue a certificate of competence to warehouse operators, inspectors and agricultural product certifiers.

The regulator will also have an advisory board, which will be comprised of representatives from the ministries of Trade & Industry and Agriculture, the National Bank of Ethiopia (NBE), the Ethiopian Standards Agency, the Federal Cooperatives Agency, the Ethiopian Bankers Association, the Association of Microfinance Institutions and the Ethiopian Chamber of Commerce & Sectoral Association.

It will have additional members of independent experts nominated by the Bankers Association and the Chamber of Commerce and a rotating representative from the warehouse operators. The head of the regulator will serve as the secretary of the Board.

The Advisory Board will work on the recommendations including legal frameworks, additional agricultural products and endorsing strategies. It will also have standing committees under its wing in charge of nominations, operation, risk, and complaint hearings that will work on the jurisprudence, warehousing operations, finance and risk management, and appeals against administrative measures taken by the regulatory body, respectively.

The bill comes 17 years after the Warehouse Receipt System Proclamation was legislated.

“There hasn’t been any progress for the last 17 years, because at the time the Ministry was not organised and there was not any implementing legislation,” said NurHussien Gasha, crop market expert at the Ministry of Trade & Industry.

“We didn’t alter the proclamation, because it was well-designed and appropriate for the time,” NurHussien said.

The warehouse receipt system will function when farmers deposit agricultural products in an approved warehouse operator that will give out a warehouse receipt, which can be either paper-based or electronic. The receipt, prepared by the regulatory body, will consist of the quality, quantity and date the agricultural goods were stored in the warehouse.

The quality and the quantity of the agricultural products to be deposited in the warehouse will be executed by a certified agricultural product certifier, which has received a certificate of competency from the regulator. A warehouse operator, upon entry to the warehouse receipt system, has to present the financial standing of one million Birr and has to have insurance coverage for the warehouse.

To set the standards of a warehouse, National Agricultural Warehousing Service Standards have been designed by the Ethiopian Standards Agency, in collaboration with IFC. It was approved by the Ethiopian National Standardisation Council in June 2019. The National Agricultural Warehousing Service Standards will grade prospective warehouses under A, B and C categories.

The warehouse operator will also have to present a performance bond, a bond issued by a bank guaranteeing the fulfilment of the soundness of the goods in the warehouse. The type of performance bond has yet to be decided in the regulation.

In order to build trust on the safeness of the agricultural products in the warehouse, the bill also proposes the formation of a Settlement Guarantee Fund, under the regulator.

The Fund, which will source capital from different entities including the government and development partners, will compensate in cases where the capital of the approved warehouse operator and the performance bond cannot cover losses incurred if there is any damage to the goods inside the approved warehouse. The contribution of different parties, the administration, and the details of the Fund have yet to be decided by the regulation.

The warehouse receipt system will simplify the market, improve grower incomes and reduce food loss, according to NurHussien Gasha, crop market expert at the Ministry of Trade & Industry.

The system will resolve the current constraints for farmers to access credit from banks as the only assets they have are crops, according to Jotework Gudeta, a financial sector specialist at IFC.

In the last five years, banks have availed less than 10pc of their loan portfolio to the agriculture sector.

“It’ll also prevent post-harvest loss from the mishandling of agricultural products,” Jotework said.

Dereje Zebene, president of Zemen Bank, also believes the system is a remarkable initiative, especially its intentions.

“But from the perspective of a financial institution,” said Dereje, “it needs a solid assurance to be entitled to proceeds after the liquidation of the commodity if any damage is inflicted on the goods.”

It is hard to say if things will be implemented as written on the ground, and it also needs an extensive capacity building and awareness creation campaign for farmers, according to Dereje.

Even though there was no regulation that followed the proclamation, the Ethiopian Commodity Exchange started a warehouse receipt system six years back with sesame, maize, white pea beans and wheat. ECX had kicked off the service with Commercial Bank of Ethiopia, Hibret and Nib banks. However, after functioning for a year, the system was cut short.

There was a hiccup in the implementation of the practice, according to Netsanet Tesfaye, corporate communications manager at ECX.

“The local consumption for maize and wheat was high, and the production didn’t matter much for export levels,” he said.

At the end of last year, the ECX reignited the system after conducting a comprehensive study with IFC. It has started with maize as a piloting stage in two warehouses in Neqemte and Bure.

“We plan to add more agricultural goods and warehouses,” said Netsanet.

This is going to be a game-changer in the value chain from the producer to the trader, according to Alebel Weldesilassie (PhD), a country economist at the International Growth Centre.

“In addition, it’ll also increase the market power of smallholders by enabling them to choose at what point in the price cycle to sell their crops,” he said.

But there must be well-established market information since the system requires it, especially on prices and crop forecasting, recommended the expert.

Read the original article on Addis Fortune