Impact of Warehouse Receipt System on Access to Markets and Income of Smallholder Maize Farmers in the Northern Region of Ghana



Smallholder farmers have limited access to credit for their farming activities due to lack of collaterals that are acceptable by formal financial institutions. The farmers sell immediately after harvest at low prices to ease their financial constraints, which consequently earn them low incomes. In order to overcome these problems, warehouse receipt system (WRS) is suggested as the best alternative scheme. The WRS in Africa however lacks legal and institutional framework to ensure its successful operation. The system is mostly used by large processors, importers and exporters to secure loans for their transactions, and it is unavailable to smallholder farmers who suffer most from financial exclusion due to lack of collateral. This thesis therefore assesses the impact of WRS on access to markets and income of smallholder maize farmers in the Northern Region of Ghana. The study specifically sought to address the following issues: the institutional arrangements of WRS in Ghana, extent of farmers’ awareness and perception of WRS, and effect of WRS on access to credit, output market and farm income. Data was collected from 400 randomly selected maize farmers in six communities in the Northern Region. Apart from descriptive statistics, endogenous switching regression model (ESRM) and propensity score matching (PSM) were employed to assess the effect of WRS on access to credit, output market, and crop income. In terms of institutional arrangements, the study identified partial legislation and slow implementation of commodity exchange market as the key limitations to successful operation of WRS. Over 80% of the farmers perceived the improved storage, market access and reduced transportation cost as the three most important benefits of WRS. The three most important WRS constraints perceived by the majority (80%) of farmers were: unfavourable condition of community warehouses, lack of insurance at community warehouses, and a few lending institutions supporting the system. About 35% of farmers participated in the WRS in 2016. Findings from both the ESRM and the PSM show that the main factors that positively affect smallholder farmers’ participation in WRS are education, farm size, level of production of maize, and membership of farmer-based organisation. Ownership of storage facility, cost of inputs, and payment of taxes reduce the possibility of participation in WRS. Participating in WRS has the potential to increase

  • amount of credit accessed by GH¢219.82 per annum, 2) quantity of maize supplied by 18%; and crop income of smallholder farmers by 13%. In order to sustain the positive impact of WRS, farmers should be encouraged to expand their farm sizes and join FBOs for consistent learning. Policy makers should facilitate the passage of “commodity exchange and warehouse receipt system bill” into law. The law and an active commodity exchange market will boost the confidence of financial institutions to support the


  • Background

Smallholder farmers are faced with limited sustainable access to credits from formal financial institutions. These institutions have widespread infrastructure and funds that is mainly accessible to the urban dwellers and not rural smallholder farmers (Aryeetey, 2008). Only 4.7% of rural dwellers in developing countries worldwide have access to loans from formal financial institutions. In Africa, agriculture employs about 55% of the total population but approximately 1% of the total bank lending is obtained by smallholder farmers (IFC, 2014).

In order to ease their financial constraints, most farmers sell their produce immediately after harvest at low prices and this is due to lack of finance for consumption smoothing and for purchase of inputs for the next growing season. If farmers are able to postpone sales for some time, they would benefit from higher prices. Prices appreciate by about 80% within six months after harvest (Coulter and Poulton, 2001). Improved financial services to rural folks are therefore essential to enhance farm productivity and poverty reduction. However, the development of rural financial systems is hindered by high cost of delivering financial services to smallholder farmers (Onumah, 2003), due to the underdeveloped financial service systems.


Apart from the high cost of delivering financial services, banks perceive rural smallholder farmers as not credit worthy. Financial institutions are unwilling to lend to farmers because of uncertainty of peripheral factors such as missing markets for their


produce (Cocciarelli et al., 2010). Another factor that increases the credit risk of rural borrowers and reduces their access to credit from formal financial institutions is the lack of insurance products for their produce. Agriculture is considered a risky business characterised by vulnerability to adverse weather and other catastrophes such as floods, pest infestation, fire and theft. These problems coupled with little or no insurance product to mitigate any future loss make lending to smallholder farmers unattractive (Besley, 1994).


Another problem confronting smallholder farmers in their efforts to access credit is the collateral policies. Farmers are unable to secure loans because they cannot meet the collateral demands of financial institutions (Owusu-Antwi and Antwi, 2010). Assets such as land cannot be used as collateral, partly because of lack of effective legal systems or collateral registry systems making valuation and liquidation of rural assets difficult.


Collaterals are easy to liquidate guarantees required by banks as risk mitigating strategies against defaults by borrowers (Bond and Rai, 2002). High value collateral is needed for larger loans, term loans and for lower interest rates. Micro borrowers such as smallholder farmers have a challenge in providing collateral because they do not possess the types of assets required to pledge as collaterals. In order to assist such borrowers in growing their businesses, Demirgue-Kunt et al. (2008) emphasise that financial institutions can offer secure lending with collateral substitutes such as third party guarantees, pledged savings, interpersonal trust, among others to reduce lending risk.


Collateral substitutes replace the conventional assets acceptable by banks as collaterals in order to pave way for small scale businesses and farmers to secure their loans. Contrary


to the conventional legally accepted collaterals, collateral substitutes are in the form of moral, social or other pressure that have no or little market value, and claims cannot be enforced through courts (Balkenhol and Schutte, 2001 ).


In practice, different financial institutions have adopted other substitutes as collaterals in addition to already established ones. Menkhoff et al. (2012) in their study on collateral and its substitutes in emerging markets’ lending reveal that guarantees and relationship lending are the two most important collateral substitutes. Guarantees are often used by formal financial institutions regardless of loan size. Since the basic function of collateral is to screen out borrowers and protect the interest of banks against default risks, in order to decide on the form of collateral to accept, financial institutions consider the cost of monitoring and collecting a movable asset used as collateral substitute, and the possibility of selling it to pay off a loan, in case of default (Abukasawi, 2007). Example of a movable asset that can be considered by banks as a collateral substitute is a durable commodity (such as maize) stored in a reputable warehouse.


Maize is a non-perishable commodity and one of the most important cereal crops in Ghana, constituting 55% of grain output (Angelucci, 2012). Post-harvest losses of maize are a major challenge in Ghana, resulting from poor harvesting, drying, and lack of adequate storage infrastructure. Stathers et al. (2013) explain that in the Northern Region, maize is often stored in small lots at home and in silos with poor handling such as drying on the ground which leads to high levels of foreign matter, high moisture content, and inadequate protection from pests. The result is poor quality maize with low market value, leading to low incomes and negative impacts on livelihoods of farmers.


Agricultural markets are characterised by price variability which is influenced by the level of inventories as well as the forces of supply and demand (Badiane et al., 1997). Smallholder farmers are also confronted with poor access to formal markets; they have limited selling alternatives and find it difficult to enter into contractual relationships due to lack of trust and education (Coulter, 2009). The local markets within which smallholders operate are characterised by uncertainties and risks in terms of price for their produce. Farmers are often obliged to sell at low price and are usually cheated by buyers on weight or volume, and quality (IFAD, 2003). Farmers are exposed to theft incidence, failure on the part of buyers to enforce contracts, and uncertainty concerning government interventions on price (Onumah, 2003). Farmers can reduce the post-harvest and marketing challenges by deposing their grains in a reputable warehouse for a warehouse receipt.


Coulter and Onumah (2002) define warehouse receipts (WR) as “documents issued by warehouse operators as evidence that specified commodities, of stated quantity and quality, have been deposited at particular locations by named depositors” (Coulter and Onumah, 2002, p. 323). Under this arrangement, the owner deposits the commodity such as maize, in a reputable warehouse and a receipt that stipulates the quantity, quality and type of product deposited is issued. The warehouse receipt may be non-negotiable or negotiable, meaning ownership is transferable, which makes it quite suitable for collateral purposes. Financial institutions may therefore be willing to give loans to farmers against this security in the appropriate legal environment for a portion of the value of the underlying commodity. Farmers who use the system would have access to funds for their


farming activities and consumption smoothing until they are ready to sell the commodity (Coulter et al., 2013).


When grain is deposited at warehouse for storage, it is dried and treated with chemicals. This minimizes post-harvest losses and increases shelf life of the grain. The grain is then weighed and graded by quality before it is stored. Two certificates are issued to the depositor by the warehouse operator; certificate of pledge and certificate of title. The depositor uses the certificate of pledge as collateral against the commodity in stock to secure loan from a formal financial institution that is willing to accept the pledge. The bank provides funds at a specified %age of the value of the commodity in stock which is the first source of repayment. The farmer (depositor) later sells the commodity, by transferring the certificate of title to the buyer and notifies the lender. The buyer pays the price of the commodity to the bank to receive the certificate of pledge. Both certificates are taken to the warehouse operator to retrieve the goods. The bank, after deducting the loan and its interest from the amount received from the buyer, then transfers the balance to the farmer.


WRS can greatly facilitate financing of agriculture as it could serve as credible collateral for agricultural credit (Mahanta, 2012). It is therefore an innovative agricultural financing product which is well accepted by most financial institutions. The commodity in stock can easily be traced and record of the farmer is readily available. This lowers risk to the lender, thereby lowering financing charges to the borrower. Farmers can obtain short- term loans as working capital by participating in a WRS. The scheme also reduces pressure on the farmer to sell the farm produce immediately after harvest to alleviate financial constraints. They can wait and sell later when prices are good.


Having in place a reliable and cost-efficient system for issuing warehouse receipts not only enhances commodity financing, but also contributes to improve the efficiency and transparency of commodity marketing (Hollinger & Rutter, 2009). Onumah (2003) reveal that storage in warehouse receipt system can help smallholder farmers to access agricultural commodity exchange market in order to obtain good prices for their produce. Through the system, buyers are assured of the quantity and quality of the commodity, and the ability of the seller to deliver the goods as scheduled. The system also prevents cheating on weights and quality; moderates seasonal price variability and promotes instruments to mitigate price risks (Coulter and Onumah, 2002). The price variability is prevented through the provision of appropriate storage facility to ensure that grain surpluses are absorbed after harvest. This sets the price at equilibrium since there is no excess supply to the market. The storage facility further guarantees adequate future supply of grain to the market. This prevents shortages and therefore sets the price at equilibrium.


The WRS functions properly when key fundamentals are in place. Towo and Kimaro, (2014) note that availability of good physical warehouse facilities is primary requirement to establish a WRS. This assures all parties that the commodity in question exists, is well protected and secured. The rights and duties of all stakeholders to the warehouse receipt system must be clearly defined. There must also be high levels of trust among parties, particularly the assurance that the warehouse operator will not release the produce to any party other than the owner or the legitimate bearer of the receipt. There must be a regulatory body and institution that provides grading and standard services to ensure that the produce is of the precise type, quantity and quality as stipulated. The legal


environment must give financial institutions the sole right to sell the commodities in the event of default by the borrower (Nordier, 2013). The legal framework of the country must also support the use of warehouse receipt (WR) as a negotiable instrument, which enables one to transfer the receipt to a third party who is willing to buy the produce. These arrangements contribute immensely to a successful WRS.



1.2               Problem Statement

Warehouse receipt system is considered as an inventory credit system. Inventory credit system in Ghana was first established in 1989 by Technoserve (a private non-profit organisation) on pilot basis. In collaboration with Agricultural Development Bank (ADB), Technoserve designed the programme with the aim of providing financial assistance and storage facility to smallholder farmers to enable them obtain higher prices from later sales (Onumah, 2010). The stored grain was to serve as collateral to banks that were reluctant to give loans to farmers due to lack of collaterals. Technoserve initially started with maize deposits and later expanded to cowpeas, groundnuts and rice. The programme covered a greater part of the country and was successful in maintaining higher prices of maize for farmers and helped them to access credit (Londner et al., 1999). In 1997, importation of maize into the country increased following policies of the government, and depressing the local price of the commodity. The programme was not sustained due to the small volumes of grains deposited by farmers (Kwadzo, 2000); and high operational cost incurred by Technoserve (Coleman and Valeri, 2006).


In 2010, WRS was established by the Ghana Grains Council (GGC) with the aim of improving the livelihoods of smallholder farmers in rural areas. GGC is a private sector


organisation which comprises different stakeholders in the grain value chain. In December 2012, the council launched the first Warehouse Receipt with financial and technical support from United States Agency for International Development (USAID) under the Ghana Agricultural Development and Value Chain Enhancement (ADVANCE) project. In 2016, the GGC had five certified warehouses in the Northern region; warehouses issue electronic receipts, with special security features. Total capacity of the main warehouses is 21,500 MT (Table 1.1). There are nine approved community warehouses in the Northern region of about 900MT total capacities (Table 1.2). Though the community warehouses do not have the mandate to issue warehouse receipts, they are able to manually issue “Goods Received Note” (GRN) to farmers. The GRN currently cannot be used to access credit from formal financial institutions because it lacks adequate security features. Farmers can collectively send grains aggregated at the community warehouses to a certified warehouse for an electronic receipt which can then be used to access credit from formal financial institutions and distributed to the smallholder farmers who participate in the scheme.


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