A warehouse receipt system (“WRS”) is defined under the Warehouse Receipt System Bill 2018 as “part or the whole of the process of depositing commodities in a licensed warehouse, the issuance of a warehouse receipt reflecting the quantity and quality of the deposited commodity, the management of the transfer of the receipts as a document of title and includes the regulation of warehouses and actors associated in the processes”.
The benefit of a WRS is that the receipts issued are acceptable to banks as collateral for loans to the producer or trader of the commodity. In addition, a WRS enhances participation of smallholder farmers in the market as the warehouses allow them to collect, consolidate and sell their products jointly and reduces post-harvest losses for farmers who use warehouses that have mandatory storage and handling standards. Further, the storage and records by the warehouses aid to improve food security within the country.
Kenya does not have legal framework for warehouse receipting but, the Eastern African Grain Council, a self-regulatory body, took the lead role in drafting WRS regulations to facilitate warehouse receipting on contractual basis and banks such as Equity Bank embraced the development by issuing loans to farmers with warehouse receipts as collateral.
The National Cereals and Produce Board has also since certified warehouses for provision of better and professional storage at a reasonable cost under its WRS and such warehouses provide farmers or depositors with warehouse receipts. However, the absence of a statutory foundation has meant that the use of the warehouse receipting as a tool of trade in agricultural commodities has not achieved its full potential.
In a country where over 25% of GDP is derived from the agricultural sector, the lack of a centralised WRS remains a significant gap.
The objective of the 2018 Bill is to provide the required legal framework and address marketing challenges associated with the cereals and grains subsectors. It is currently in the 1st reading stage at the National Assembly.
Salient features of the Bill
- Establishment of the Warehouse Receipts System Council: The Bill establishes the Council as a body corporate which shall be mandated, among other things to establish, maintain and develop a warehouse receipt system for agricultural commodities in Kenya, establish a central registry for the management of warehouse receipt transactions and develop, and implement an efficient commodity grading and weighing system that ensures quantity and quality assurance.
- Licensing of warehouse operators: The Bill introduces licenses for warehouse operators. The licenses shall be issued by the WRS Council and shall be valid for a period of twelve (12) months. The Council may also refuse to grant a license, suspend or revoke a license.
Warehouse Receipts: A warehouse operator under the Bill is mandated to issue a receipt for any agricultural commodity deposited in his or her warehouse in either hard or electronic form. The warehouse receipt shall be a document of title to goods and need not to be in any particular form. However, the receipt must state the following:
- name and physical address of the warehouse operator;
- name and address of the warehouse where the goods are stored;
- license number of the warehouse operator;
- date of issue of the receipt;
- serial number of the receipt;
- particulars of the depositor;
- statement whether the goods will be delivered to the bearer to a specific person or his order for negotiable receipt;
- full description of the agricultural commodity deposited;
- signature of the warehouse operator; and
- statement that the agricultural commodity covered by warehouse receipt is insured by the warehouse operator for full value.
Central Registry: The Bill also establishes a central registry where all warehouse receipts issued shall be delivered for registration within fourteen (14) days of any issue or negotiation. The Registrar shall issue a Certificate of Registration which shall be conclusive evidence of the issue or negotiation of a warehouse receipt. The Bill further provides that the Cabinet Secretary in consultation with the Council may make regulations to govern the day to day operations of the Central Registry.
Negotiation and transfer of warehouse receipt: The Bill provides that a warehouse receipt issued to a person may be negotiated by endorsement and delivered to another specified person. A person to whom a receipt has been duly negotiated shall acquire the same title in the goods as the person who negotiated to him. It also creates a direct obligation of the warehouse operator to hold the goods for him as if the warehouse operator had contracted directly with him; and all rights accruing under the law of agency.
Impact on Agribusiness and Financing in Kenya
If enacted, the WRS Bill shall play a significant role in the growth of the agricultural sector in Kenya in conjunction with the Movable Property Security Rights Act No. 13 of 2017, an Act which facilitates the use of movable property as collateral for credit facilities.
Under the Movable Property Security Rights Act No. 13 of 2017, a warehouse receipt is considered a negotiable document capable of being used as collateral and registrable in the Movable Property Security Rights Registry, also known as the Collateral Registry.
It will boost agribusiness in this country by ensuring that farmers have access to licensed warehouses on reasonable terms. It shall also formalise the use of warehouse receipts as collateral and increase access to credit facilities by small scale farmers as banks are likely to issue such credit in the existence of a legal framework providing for licensing of warehouse operators and registration of the warehouse by the government.
With regards to the enforceability of the receipt as a security, the WRS Bill indicates that a certificate issued by the Central Registry is conclusive evidence of the issue or negotiation of a warehouse receipt. The WRS Bill also provides that commodities stored at the licensed warehouses must meet the standards published by the Kenya Bureau of Standards and be weighed using equipment certified in accordance with the Weights and Measures Act, thus providing critically needed reassurance to lenders as to the quality and quantity of the goods for which the receipts were issued. In addition, further enforcement support is provided by the Movable Property Security Rights Act at Part VII which sets out how a creditor can exercise its rights in case of default by the debtor.
WRS in the Capital Markets and Looking Beyond Agriculture
An area of uncertainty in the Bill is the relationship the WRS will have with the proposed commodities exchange system to be implemented by the Capital Markets Authority under its Master Plan. The Bill is silent as to whether it will be possible to trade warehouse receipts in a spot commodities exchange or commodity derivative markets and any oversight role the Capital Markets Authority would have in the trading of warehouse receipts as part of its regulatory mandate.
Another notable limitation in the Bill is its exclusion of non-agricultural commodities from its scope, such as extractives. It would seem more appropriate to widen the scope of the Bill to cover warehouse receipting of all tradeable commodities and factor in the potential of the capital markets to mobilise credit for agriculture, smooth market prices and improve the market power of small producers.
1FAO, 2015: Designing warehouse receipt legislation
2Factors Influencing the Use of Warehouse Receipts as A Financial Instrument In Kenya: Chitra Prakash Sanas, October 2014
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