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Home Editorial/Features

Agricultural financing through the GCX

July 10, 2020
in Editorial/Features
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The Ghana Commodities Exchange stands on the brink of transforming Ghana’s agricultural sector – or at least the parts of it that deal in cash crops and food crops that are needed by industry as production process inputs.

It is ironic however, that after decades of inadequate financing for agriculture, due to problems  that have been identified long ago, but to which solutions had not been devised, the GCX’s break through at last has gone under the radar of public attention; indeed even institutions and individuals who are supposed to be major stakeholders in the entirely viable solution now being introduced, are not even aware of its existence, not to talk about knowing how it works.

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If they are not brought on board quickly, the solution to one of Ghana’s most longstanding, most critical challenges – that of securing financing for agriculture – will simply lie on the shelf, grossly underutilized, and the problem will persist unnecessarily.

The solution is the introduction of the Warehouse Receipts Financing (WRF) system whereby farmers use their unsold produce held in GCX approved warehouses as collateral for direly needed financing from commercial lenders. Lending financial institutions get extra comfort from the fact that the same GCX which facilitates the collateral for lending also provides a ready market for the produce, thus ensuring that the produce will be turned into cash flow required for servicing and amortizing the farmers’ debt.

This is similar in some ways to the model through which COCOBOD borrows at least US$1.3 billion every year to finance its purchases of cocoa from local farmers, its receivables from the sales of the cocoa on international; commodity markets being the regular source of repayment of the loan taken.

Instructively, COCOBOD is so well trusted by international lenders that it is able to borrow at barely half the interest rate at which the Government of Ghana itself borrows through the issuance of Eurobonds.  Similarly, farmers using the GCX for  its WRF and for sale of their produce, should be regarded as relatively safe lending bets and so should be able to secure financing at relatively low interest rates too. After all, the collateral would be sold for loan repayment through the same GCX whose warehouse receipt facilitated the loan in the first place.

However, for Ghana to enjoy the full benefits of this potentially transformational system, the institutions, enterprises and individuals who are supposed to comprise the value chain need to be made  aware of the value chain’s existence and how it works.

Currently, precious few commercial lenders are aware of the WRF and even how the GCX itself operates. Even fewer farmers are aware too.

Astutely, the GCX has started bringing rural and community banks into the system – so far, five are already fully part of it and 10 more are being primed. But to make this opportunity available to all small holder farmers nationwide, more than 100 more RCBs will need to be co-opted too. Bringing the commercial banks, savings and loans companies, micro-finance institutions and the other specialized deposit taking institutions would be a good thing too since they all have financing capacity and customers who fit the bill.

At the same time intense enlightenment of small holder farmers themselves is needed. The ideal jump off points here are local language FM stations nationwide.

Without getting all these participants on board, this potentially revolutionary initiative will remain unutilized potential. This is why all stakeholders – government, participant enterprises, development assistance partners and all – need to get on board and help push the system forward.

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