October 14 2013
In a bid to ensure that a suitable regulatory framework for the exchange and trade in produce and other related commodities exists, the Warehouse Receipt System Bill was recently introduced and is undergoing a second reading in the Upper Chamber of the National Assembly.
The warehouse receipt system takes different forms in different countries, but the underlying concept is generally the same: the warehouse receipt system is a tripartite arrangement between a farmer or owner of commodities, an approved warehouse operator and a banker or financier. The scheme allows farmers or traders to access storage facilities and finance by depositing their produce with a warehousing agent. The warehouse agent then issues deposit receipts to the farmer or trader, which may then be used to obtain credit from financial firms or cooperative bodies, while the warehouse agent guarantees that the lenders' collateral is secured. Deposit receipts may then be traded on an exchange, depending on whether they are negotiable or non-negotiable.
When the farmer or trader discharges the loan, he or she will collect the produce. Conversely, a default in repaying the loan entitles the warehouse operator or bank to use the farmer's produce. An advantage to the farmer or trader is the ability to hold on to commodities for a longer duration until a time when market prices are more favourable, as opposed to selling at harvest periods due to a lack of storage or the need for finance. The advantage to the financier is that the loans provided are adequately secured, albeit subject to any price fluctuations of the commodity.
When passed, the regime is also expected to support the operations of the Abuja Commodities and Securities Commission (ASEC) which, since its formation in 1998, has failed to break even owing to a number of factors, including a thin equity base from a dearth of shareholder funds and the lack of an efficient warehouse receipt system and regulatory regime. In addition, the proposed divestment of the federal government's interest in the ASEC to the private sector is expected to revitalise the market. However, to reap the benefits of privatisation, the warehouse receipt system must be properly functional and regulated to ensure that the rights and obligations of the respective participants are adequately defined. Although the ASEC has issued the Rules and Regulations for Warehouse Operators, these have been found to be inadequate as they fail to define the legal rights of third-party holders of deposit receipts.
A robust regulatory framework which clearly defines the rights and roles of participants is crucial for a functional warehouse receipt system and would:
Empirical studies from countries such as Tanzania, Zambia and Uganda demonstrate that the scheme continues to yield results.
It is hoped that the enactment of the Warehouse Receipt Bill will improve confidence in the structural framework for trading in agricultural produce (among other things), introduce efficiency into the process and create opportunities within the sector.
Establishing a functional warehouse receipt system has several benefits, including:
This is also a welcome development within legal quarters in view of the creation of an entirely new area of commercial practice for warehousing and haulage agents, finance, investment and insurance houses and securities firms, which are expected to flood into the sector, inevitably resulting in increased opportunities for commercial legal practitioners.
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