Agriculture is one of the biggest sectors in the economy, contributing 24 percent to Pakistan’s GDP.It is also the largest employer in the country, accommodating 45 percent of the country’s labour force. Like numerous other sectors, it faces a number of challenges that include but are not limited to shortage of and access to finance such as, volatility in input and output prices, natural disasters, power shortages and weak infrastructure. On the point of infrastructure, lack of proper storage and warehousing facilities impose a major cost on the sector. A report of State Bank of Pakistan (SBP), titled ‘Framework for Warehouse Receipt Financing System’ estimated that post-harvest losses for grains are 15-18 percent; while around 25-40 percent of the produce is lost in the case of fruits and vegetables.An efficient mechanism of avoiding such high losses is Warehouse Receipt (WHR) financing.WHR financing is a form of institutional credit extended by banks to farmers and traders against physical commodities stored in licensed warehouses. The system, by enabling farmers to desist from distress sales immediately after harvest, enables them to attain higher prices for their produce, resulting in improved returns. The WHR financing mechanism, supported by a developed ecosystem and strong linkages between farmers, financial institutions, warehousing and subsidiary service providers, may therefore prove vital for improving efficiency, transparency of the distribution of agricultural commodities, and benefit all stakeholders.
The mechanism was introduced in Ghana in 1989, in collaboration between the Department for Cooperatives and the Agricultural Development Bank (Ghana), with the objective of providing access to finance to farmers, reducing food insecurity and increasing resilience to natural disasters and climate change. As a result of the initiative, farmers’ profits increased by an average of 94 percent. The system was launched officially in November 2017 and is anticipated to increase farmer income levels, reduce poverty and act as impetus for growth of the economy. In India, the warehousing industry is valued at around INR 560 billion, with a 10 percent annual growth. The WHR financing mechanism in the country came into effect in 2010, and since then, there has been an 800 percent increase in the amount of credit disbursed to farmers by formal financial institutions. India also has a strong Warehouse Development and Regulatory Authority (WDRA) that aims to grow and develop the warehousing sector in the country.
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For Pakistan, the viability of the WHR financing has been discussed in depth in a study conducted by Karandaaz Pakistan which can be accessed at https://bit.ly/2PEskqP. According to this study, the WHR financing mechanism essentially involves the interplay of three main components. Firstly, the legal and regulatory framework is a core ingredient and is developed in two phases. The primary legislation provides the structural framework whereas the secondary legislation entails transfers of warehouse receipts and establishing transactional and operational procedures of the WHRs, amongst others. Two regulatory bodies are ideally required for effective WHR financing, including a government regulatory agency and a collateral management company (CMC). The former is responsible for defining the structural framework and for licensing, regulatory and inspection procedures of warehouses whereas the latter overlooks the implementation of licensing processes, maintains the database and undertakes inspection of warehouses and issues warehouse receipts.In 2014, SBP developed a framework for WHR financing mechanism. Thereafter the Securities and Exchange Commission (SECP) formulated the Collateral Management and Warehousing Regulations 2017, which were approved by the Federal Cabinet in May 2017. Currently, concerted efforts are underway for the development of secondary legislation.
Secondly, given that the WHR mechanism entails that commodities stored in warehouses are considered as collateral for financing, the stor ability, scalability and an increase in post-harvest price are necessary factors. Currently, the major crops in Pakistan, including cotton, sugarcane, rice, maize and wheat have an annual yield of more than a million tonnes and are thus above the benchmark considered vital to be traded under the WHR financing mechanism. However, Pakistan lacks sufficient infrastructure for post-harvest treatments, preservation of quality, storage and other important components for efficient working of the WHR financing mechanism. Similarly, price adjustments after harvest can result in considerable profit or loss scenarios for farmers. However, trends for the previous five years show that price increases are generally prevalent in Pakistan for all major crops identified.
A network of professional and financial services, including insurance mechanisms, performance guarantees and quality verification services are the third component for efficient working of a WHR financing mechanism. A warehouse, the goods within it, and other risks related to the staff need to be insured in order to minimise risk for the farmer and the bank. Similarly, a performance guarantee providing compensation if there is a mismatch in the quality or quantity of the goods stored, has to be in place for the warehouse receipts to be accepted by the traders and the banks. Additionally, independent monitoring and standard verification services are also required to grade the quality of goods stored in warehouses.
There are several aspects which require attention in order to catalyse the process and ensure the proper implementation of the WHR financing mechanism in Pakistan.These include the development and adoption of the secondary legislation, the development of a CMC and expansion of the storage capacity, amongst others.
It is imperative that all stakeholders work in close collaboration with each other, championed by the government, to develop the WHR financing mechanism.
