Warehousing, a system where farmers can deposit their produce and sell it later, has not helped farmers to access finance from financial institutions, a study has found.
Through the warehouse receipt system, farmers deposit their harvest at a warehouse. They are then issued a receipt with which they can claim their produce at the time it is ready for sale. They can also use the receipt as collateral to acquire loans from financial institutions.
This, however, has not been happening in Uganda as most commercial banks reject these receipts or simply don’t want to give credit to farmers, who continue to be seen as risky, researchers at the Makerere University-based Economic Policy Research Centre (EPRC) have claimed in a June 2017 study.
Titled ‘Uganda warehousing receipt system: improving market competitiveness and service delivery,’ the study found that stringent requirements and the inadequate coverage of banking facilities hinder farmers’ access to loans.
“Banks have requirements such as appraisal reports from the collateral manager. The fact that applicants were required to apply for credit before the harvest season and the high interest rates [remain a challenge] to most farmers and traders,” researchers said.
Also, collateral managers demanded exorbitant fees, which reduced anticipated profits from the sale of produce – pushing traders to alternative sources of credit, which often required other types of collateral such as land, houses and vehicles.
Farmers also turned to microfinance institutions (MFIs). Farming is a risky activity in Uganda, especially due to the unreliable weather patterns, explaining why most banks shun it.
Warehousing, though, would be a sure way to guarantee financial institutions that their money would be returned once a farmer sells their harvest.
The few farmers that received credit, the study said, got the money at a high cost because they had to travel to cities as participating banks were inadequately networked in the countryside.
“This required them to have transport fare and accommodation [as] the loan processing took multiple days.”
Meanwhile, most farmers found it hard to sell at warehouses because they constantly suffered financial emergencies. Researchers found that this was “because of low productivity and often relying on one major cash crop.”
This means the farmers were susceptible to exploitation from middlemen who are able to give them quick cash.
Farmers preferred to sell at the farm gate price to avoid incurring higher costs of travelling to another market or succumbing to even lower prices. Also, governance was a big challenge for those that went ahead and used warehouses.
They usually disagreed on the right time and price at which to sell.
“Governance challenges largely contributed to the collapse of some cooperatives — like the Nyakatonzi Warehouse facility in Kasese…,” the study observed.
Researchers also found that there was an unbalanced distribution of public warehouse facilities.
“The distribution of these warehouses is not in tandem with the production capacities of regions in Uganda,” they wrote.
“Current warehouse facilities support the aggregation of cereals, pulses and a few traditional commodities, yet the public warehouse receipt system is designed for the accommodation of various commodities and [is] not limited to agricultural commodities,” the study said.