Improving Access to Rural Finance through Regulated Warehouse Receipt Systems in Africa

Drawing from the Zambian model, this paper examines how the Warehouse Receipt Systems can facilitate the flow of rural credit. The author states that promoting efficient, sustainable and widely accessible rural financial systems remains a challenge because of many factors:

• High cost of delivering rural financial services;
• Susceptibility of the rural people to covariant risks;
• Lack of risk management opportunities in rural areas;
• Lack of suitable collateral.

Warehouse receipts (WR) are documents issued by warehouse operators as evidence that specified commodities, of stated quantity and quality, have been deposited at particular locations by named depositors. WR can be used to increase access of financial services as these can be used in overcoming several constraints associated with rural financial services. The WR system can:

• Formalize trade transactions in rural areas;
• Generate a track record of farmers, enabling banks to screen borrowers;
• Mitigate credit risks as the stored commodity can be used as collateral;
• Reduce monitoring costs for lenders as a few warehouse operators can assure the loan performance of many borrowers.

According to the author, the WR system generates other exciting possibilities as well:

• Better marketing of rural produce;
• Formation of commodities exchanges;
• Early price discovery for rural producers.

However, the WR finance is often unavailable to rural producers, especially smallholders. In conclusion, the author identifies a lack of enabling policy environment which leads to market imperfections as the most significant challenge in establishing WR systems in Africa.