Federal Regulation Grants Receipt for Farmers, a New Product for the Banks

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A newly enacted regulation by the Council of Ministers lets eligible producers pledge certified warehouse receipts as collateral for short-term loans covering up to 70pc of the appraised value of their stored produce.

It takes aim at a seasonal cash squeeze that forces many growers to sell cheaply at harvest, at the moment they need money for fertiliser and the next planting season.

The problem it targets has long defined the farming year. Where agriculture depends heavily on rain-fed production, harvests arrive in a short window and send a flood of grain to market, with reports showing that more than half of farmers depend on the rain-fed season. The resulting oversupply drives prices down as farmers need cash for inputs, leaving many little choice but to sell cheaply or watch their produce rot.

The new regulation offers an alternative, letting a farmer store the crop, borrow against it and sell later when prices recover.

To run it, the regulation sets up a multi-agency Warehouse Receipt System Board, chaired by the State Minister for Trade & Regional Integration, in charge of trade relations and export promotion, Tazer Gebregziabher.

The Board brings together officials from the Ministry of Trade & Regional Integration (MoTRI), the National Bank of Ethiopia (NBE), the Ethiopian Agricultural Authority (EAA) and the Ethiopian Cooperatives Commission (ECC), with a mandate to remove the barriers that have kept formal credit beyond the reach of much of the countryside.

The primary law had existed for years but sat idle, according to Fikadu Tilahun, a technical adviser at MoTRI, because no one had been assigned to look into it.

“Even if the proclamation was issued in past years, implementation was tough, as there was no clear distinction between who did what," he told Fortune. "The regulation was prepared to make it easily applicable."

However, the financing gap it confronts is wide. Agriculture has stayed severely underfunded by the commercial banks. Although an NBE directive requires them to channel at least five percent of their annual lending into the sector, private banks have put in between one percent and three percent.

The agricultural sector has drawn less than 10pc of total bank credit of 1.7 trillion Br in recent years, according to the NBE's national agricultural financing roadmap, a striking shortfall for an industry that drives national output.

Under the new regulation, growers present certified warehouse receipts to participating banks and secure short-term loans of up to 70pc of the appraised value of their stored crop, at preferential rates. The operator authorised would appraise the grain and document its quantity and price at deposit. Access is limited to individual smallholders, cooperative unions and agro-processors.

To curb speculative hoarding and protect export earnings, the regulation bars export commodities and confines eligible collateral to five staples, including teff, maise, wheat and malt barley. Produce may remain under a receipt for no more than six months.

Soybeans, also included in the produce, are the least grown, farmed by up to one million producers, while wheat is grown by about four million farmers. Maise is the most widely cultivated, with up to eight million households, and teff, the national crop, by up to seven million.

Warehouse operators face a real barrier to entry, having to hold a minimum working capital of one million Birr, and obtain annual competence certificates from the Trade Ministry. They have to post a bank or insurance performance bond covering 10pc of the value of stored inventory, and carry comprehensive insurance against fire, natural disasters, theft, or employee negligence.

The Ethiopia Commodity Exchange (ECX) is the system's operational backbone, running 60 warehouses through 25 branches and deploying 18 facilities for warehouse-receipt services in the past fiscal year, having leased unused space once reserved for coffee. Its service charge is set at 0.2pc, with minimum interest rate. According to Bezuayehu Berihun, warehouse finance receipt manager at the ECX, the clearer framework is an opportunity to reset a system long dogged by implementation trouble.

"Getting loans from banks was tough," he said. "I hope things will now change and access to loans will become easier for our farmers."

The early numbers show a modest start. In the past budget year, federal trade officials planned to bring 26 warehouses into the system but operationalised 34, and independent operators reached five.

Depositors placed 456,392Qtls of maise, soybeans, wheat and malt barley. The ECX issued 162 receipts, facilitating 1.8 billion Br in bank loans and generating 7.6 million Br in service revenue. Even so, the rollout is in its early stages.

"We’re trying to publicise the law," Bizayehu said, noting that the state-owned Commercial Bank of Ethiopia (CBE) remains the dominant lender. However, private institutions, among them Dashen Bank, Abay Bank, Amhara Bank and Cooperative Bank of Oromia, have begun to take part. “But implementation has not reached the ground yet.”

Bankers have welcomed the clarity. Demissew Kassa, secretary-general of the Ethiopian Bankers Association, sees the mechanism as an opening for portfolio diversification.

"It's like a new product for the banks, something that benefits the farmer and the trader," he told Fortune. "Since banks issue short-term loans in the process, it’ll benefit them as well while enabling them to meet the Central Bank's portfolio allocation requirement."

Larger cooperatives are less persuaded, however.

Mesfin Eshete is the manager of the flour plant run by the Lume Adama Farmers' Cooperative Union, an umbrella of 125 primary cooperatives representing more than 70,000 farmers. His Union is weighing the terms but finds the cost structure unviable and does not view it as a long-term solution.

“The banks’ interest rates and warehouse handling fees are too costly to be encouraging," he told Fortune, questioning how the scheme would sit with the trade credit common in wholesale distribution. "For instance, some buyers purchase on credit. If we want to extend credit to a buyer, the bank won't approve it. How is that supposed to work? While the system might help short-term liquidity.’

The structural case is made by Michael Tomas Gebremariam, an in-country researcher at Euromonitor International and a former development finance consultant at Delphos, who estimates the agricultural financing gap at 98pc of the sector’s total demand.

"The regulation formalises operations for agricultural products to serve as direct financial assets," he said. "Farming is a cash-intensive business, and farmers struggle to collect cash in time for input purchases. This mechanism improves liquidity, loan eligibility and seasonal productivity."

He believes that by reserving the largest share of credit for smallholders and cooperatives, the rule guards primary producers from being crowded out by large buyers, and by quantifying output value it sets loan caps that let banks expand safely.

Michael was clear about the limitations, citing weak digital infrastructure, a shortage of certified quality inspectors, deep reliance on informal social-financing networks and weak capacity in an insurance industry built around trade-transit rather than stored-crop risk.

PUBLISHED ON [ VOL , NO ]