Rabobank Group

In Tanzania, Rabo Development works in co-operation with partner bank National Microfince Bank (NMB) to introduce out-grower schemes.

The objective of the out-growers’ loans scheme is to extend credit to out-growers. In  Tanzania out-growers are usually small farmers who produce different crops. The loans are used to purchase inputs for crop maintenance and to meet other costs related to the development of the crop. These small farmers lack the capital required to finance these inputs and have insufficient collateral to qualify for a loan.

NMB assesses applications for out-grower loans based on the experience and performance of the out-growers. In order to ensure a guaranteed market for the crops being financed under the out-grower scheme, the bank draws up a memorandum of undertaking between the out-growers (the small farmers), a factory processing the crop and the bank. This tri-partite contract ensures ttit the crop being harvested will be purchased by the processing factory and that all proceeds will be routed through the out-grower’s account with NMB in order to facilitate loan repayment. Out-growers financing covers the cost of farming and input purchases. The repayment is structured via the processor to which the out-growers deliver the commodities. No loans to out-growers are granted without  a signed memorandum of undertaking between the bank, processing factories and out-growers directly, or through their associations.

NMB provides financing to thousands of out-growers in various sectors of  a range of crops including Sugarcane farmers in Turiani and Kilombero (Illovo), Tea farmers in Lushoto Barley farmers in Arusha and West Kilimanjaro (connected to Tanzania Breweries).

Warehouse receipt financing
Warehouse receipt finance is a form of secured lending to owners (farmers, traders, processors) of non-perishable commodities such as grains and coffee that are stored in a warehouse and that have been assigned to a bank through warehouse receipts. Warehouse receipts give the bank the security of the goods until they have been sold and the proceeds collected.

Farmers in many emerging market countries lack access to short-term credits since they have no collateral. They have generally little or no choice in the decision when to sell their crops and banks see the risks of lending to primary agriculture as too high. The fact that the owners of the commodity cannot borrow against their coffee stocks also means that they have severe cash flow shortages.
As a consequence) Farmers have to await payment for their delivery until the entire trading process has been completed.
(ii) A high percentage of the transactions in agribusiness are barter transactions (e.g. CIS  countries) which are highly inefficient.

Warehouse receipts are a proven way of using the stored goods as collateral for loans. the system has been operating successfully from the early twentieth century in Western markets, But African markets lacked a well-developed agribusiness banking system. The system is now developing in Africa, especially in Tanzania, for several commodities including coffee and grains/cereals.

Warehouse receipt process
The warehouse receipt system is seasonal financing for up to nine months composed of the following steps:
(i) At harvest, the primary producer stores its grain in a licensed warehouse and receives a Certificate of Title and Certificate of Pledge. The warehouse will only release the stored grain to the owner of both documents.
(ii) When the producer borrows against the crop, the bank holds the Certificate of Pledge as security.
(iii) The producer can sell the crop to a trader or processor by selling the Certificate of Title.
(iv) At maturity, or when the trader of processor needs the crop, he can redeem the Certificate of Pledge from the bank by repaying the loan.
(v) The warehouse will release the crop to the trader or processor, that is now the owner of both documents, i.e. the Certificate of Title and the Certificate of Pledge.

With the support of Rabo Development  Warehouse receipt financing has been successfully developed in the coffee and cashew sectors in particular. NMB is looking to extend WHR financing to other sectors (e.g. SF  seeds). It has proven to be a suitable instrument and the WHR framework in Tanzania is one of the most advanced in the region.

Risk management
The risk is limited to fraud, warehouse mismanagement and price risk. No crop risk is assumed because financing is only provided based on existing stocks confirmed by WHRs. Additional guarantees are available to further mitigate the risk. The drawback is that WHR financing does not provide an answer to the large need for crop financing (agricultural inputs). NMB is addressing this by developing a ‘farm savings account’ whereby part of the surplus of the harvest proceeds will be deposited in a savings account that is pledged by the farmer as cash collateral for input financing in the next season.

Website NMB