The Warehouse Receipt System

In a warehouse receipt system (WRS) also known as warehouse inventory credit, a bank or trader relies on goods in an independently controlled warehouse to secure the credit that it provides.  The warehouse operator issues warehouse receipts, in one form or another (depending on the country’s legal and regulatory system), which form the basis of financing.

Rather than relying on the producer’s (or exporter’s) promise that the goods exist and that the proceeds of their sale will be used to reimburse the credit provider, the goods are put under the control of an independent warehouse operator (the credit providers still needs to ensure himself that the goods have not been pledged previously).  

The warehouseman who will most likely own and be qualified to run the warehouse becomes legally liable for the goods he stores.  The warehouse can also be located within a factory or processing plant to enable value addition processes to be conducted on the warehoused produce.  If these goods are stolen, damaged or destroyed, through any fault of his, he and his insurance companies have to make up for the value lost (additional insurance can be obtained for catastrophic events).  The integrity of the warehouse operator and warehouse facility is secured by government licensing and controls and by guarantees that the warehouse man has obtained from bonding companies and insurance companies (for a variety of risks, including the risk of fraud by the warehouse keeper’s staff).  

Compared with a simple bill of sale (which gives title to commodities to the credit-providing institution), the use of warehouse receipts as collateral provides the additional advantage that the commodities are no longer in the possession of the borrower, and hence if the borrower defaults, the lender has easy recourse to the goods.

Banks or trading companies will normally have few problems with advancing funds against commodities that are being stored in a reliable warehouse and have been assigned to the bank or trading company through warehouse receipts.

Processors and traders particularly exporters in Uganda have made far more use of warehouse finance than the farmers using non-negotiable warehouse receipts where financing is provided under a tripartite contractual arrangement between a bank, collateral manager and individual exporter.  

Farmers’ use in this same arrangement has been limited to cooperatives engaged in exports.    In all cases, however in the absence of a regulatory regime for inventory based financing, banks have still taken “extra comfort” in fixed asset collateral, debentures and personal guarantees to secure their lending.  These “extras” on the other hand are not readily available to small scale farmer groups.

The Warehouse Receipt Systems Act 2005 therefore, seeks to extend the scope of the current system to a wider range of depositors including farmer groups and still address aforementioned constraints that hamper performance in the agricultural sector.  It will also assure stakeholders including banks, traders and warehouse operators by mitigating various transactional risks.