Abay Bank Pioneers Lending Under Warehouse Receipt Scheme
Abay Bank has availed 50 million Br in short-term loans to two cooperative unions, pioneering lending services under a warehouse receipt scheme launched three years ago by the Ethiopian Commodity Exchange (ECX).
The two unions – Merkeb and Damot – are each to receive 25 million Br in loans using electronic receipts and against collateral of the agricultural produce stored at ECX warehouses. The receipts detail the quality and volume of produce stored at any of the 62 warehouses the ECX operates across the country. The warehouses have a combined storage capacity of 400,000tns.
The scheme allows farmers, cooperatives and unions to access loans of up to 70pc of the value of the commodities they store. However, soybeans and chickpeas are the only exportable items eligible for collateral; maize is used to secure loans from domestically-traded grains. Thirteen commodities are traded on the ECX floor.
“Our initial loan request was for 45 million Br,” Getachew Eshetu, manager of Merkeb Union, told Fortune. “However, loan officers told us we can get the additional funds after they monitor our progress.”
Merkeb Union of 140 cooperatives and 355,000 farmers operates in 11 weredas in the Gojam Zone of the Amhara Regional State. Damot Union also operates in Gojam Zone, comprising 82 cooperatives and 180,000 farmers. It has already collected a fifth of the 30,000qtl of maize it plans to use as collateral, disclosed Mezgebu Mekonnen, deputy manager.
Abay Bank plans to disburse the loans after the unions present warehouse receipts issued by the ECX, says Hailemichael Engida, credit analysis manager.
Six commercial banks, including Abay Bank, have reached an agreement with executives of the ECX after the warehouse receipt scheme was introduced in 2019. However, the initiative remained inactive pending completing a manual, according to Mergia Bayissa, deputy chief executive officer (CEO) of ECX.
A regulation that oversees the implementation of the loan scheme was approved last year, 17 years after a law was legislated to regulate a warehouse receipt system.
At the end of last year, the ECX restarted the scheme after conducting a study supported by the International Finance Corporation (IFC), a member of the World Bank Group. The latter had supported the preparation of the regulation.
Abay Bank offers a 12pc interest rate on loans to the two unions, lower than the industry average of 14pc and the highest rate recorded last year at 21pc. The lowest rate offered by the other banks was 16pc, according to Mezgebu of Damot Union. Executives at Abay contend the rate they offer is viable.
Abay has pegged rates at 10.5pc for borrowers using export agricultural produce as collateral. Its executives hope doing so will help the Bank diversify its portfolio and client base. The discounted rates are available only to unions and cooperatives and not individual farmers, Hailemichael disclosed.
Anwar Ahmed, a consultant who specialises in the commodities market, welcomes the introduction of the warehouse receipt scheme. He observes it will be beneficial to all parties involved. Farmers will be able to store their produce in a time of surplus production and sell it at better prices when the market stabilises, while it will boost trade volume at the ECX, according to Anwar.
Last year, 614,586tns of commodities valued at close to 40 billion Br were traded through the ECX.
“Banks can get an alternative source of foreign currency when the commodities are exported,” the consultant said.
However, there needs to be work done to improve awareness and stoke interest in the loan scheme among farmers, cooperatives and unions.
Farmers often sell their produce immediately following harvest, but markets are flooded with agricultural commodities forcing them to sell at buyers’ rates. They have to wait months to receive full payment for their produce should they choose to sell them through cooperatives and unions. Either path exposes farmers to financial distress.
Last year, Merkeb Union received 130,000qtl of maize, 40,000qtl of wheat and 6,000qtl of soybeans and chickpeas from its members.
Hoping to avoid dumping agricultural products following harvests, cooperatives and unions can store commodities at warehouses and sell when prices bounce back. The unions can also use the stored produces as collateral against short-term loans, which last not more than a year. ECX allows storing agricultural produce in its warehouses for up to three months.
Farmers are entitled to receive dividend payments from the unions at the end of the year.
Tesfawin Bekele is one of the 5,200 farmers who are members of Qeltafa Cooperative under Merkeb Union. A father of six, he lives in Mirab Gojjam Zone, Achefer Wereda, farming maize on 1.5hct of land. Last year, he handed over 50qtl of maize to Merkeb Union.
“I received 30pc of the total payment upfront,” he told Fortune.
Tesfawin had to wait three more months to collect the remaining amount.
Access to credit remains limited in Ethiopia, particularly in rural areas. Over the last five years, commercial banks availed less than 10pc of their loan portfolio to the 18 million smallholder farmers who cultivated 341.8 million quintals of crops on 22.8 million hectares of land last Mehir season.
Merkeb Union was among many that had turned to microfinance institutions (MFIs) to cover at least part of the payments made out to farmers.
Microfinance institutions lend at rates averaging 18pc.
Reference: Fortune Magazine, January 22 , 2022.