Case Study 3 - Financing trade and storage in Mali

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In Mali, cereal market liberalization was managed by the Cereals Market Restructuring Programme (PRMC), which was set up jointly by Government and donors. While, overall, Mali's liberalization has achieved considerable success, this is no more than partially true for the trade financing component.

In order to compensate for the reduced role of the parastatal l'Office des Produits Agricoles du Mali (OPAM), credit schemes were set up in 1987 and 1988 to assist both traders and farmers in the procurement and interseasonal storage of grain. Funds were channelled through the branches of five banks.



With traders, several mechanisms were used to ensure repayment, particularly the use of inventory as collateral. There were two main lines of credit, the "wholesaler line", lo assist larger traders handling over 1 000 tonnes of cereals per year, and the "semi-wholesaler" line, assisting those handling less than 1 000 tonnes. The stock was placed in warehouses operated by storekeepers (tiers déterteurs) which, according to the Malian Warehousing Law, had to be authorized by the Ministry of Commerce.

The banks linen made loans against the presentation of warehouse receipts. Semi-wholesalers were also required to purchase a cash bond, equivalent to a certain proportion of the value of the loan, prior to obtaining the loan. They were also required to associate into groups (Groupements d'lnterêt Economiques) to receive credit, making members jointly and severally liable.

The quantities of grain stored with loans to traders and farmers have normally been modest, but in one year (1988/89) they represented a substantial proportion of the total marketed volume (about 12 percent). However, the impact was not altogether as intended. This was a major surplus year and the extra purchasing activity prevented the market from "bottoming out" in its normal fashion. After the loans were used up, prices again fell, with the result that for 18 months, farmers and traders were unable to dispose of their stock without financial loss. This required the due date on the loans to be rolled forward for another year, and some traders (and farmers) experienced significant physical losses due to inadequate storage arrangements.

Overall the recovery of loans has been slow and incomplete. The incentive for traders to repay was diminished by the mechanism which allowed them to avoid investing their own equity in stored grain. Credits were given in tranches, based on 100 percent of the current market value of the grain, in advance of delivery to the storekeeper. By misappropriating/he last tranche traders could offset their original investment in the cash bond.

There were many difficulties in administering the schemes. Processing of loans was extremely slow and traders had to wait a month or more to obtain credits. Two storekeepers participated in the scheme, and neither performed satisfactorily. This diminished the commitment of the banks, whose performance was itself negligent, failing to manage the lending risk and failing to pursue unpaid debts. Banks might have performed better had their own funds been invested, but until 1991/92 the schemes were funded entirely with donor money. In the event they simply administered the schemes on behalf of Government without ever having any real sense of ownership.

The wholesaler line of credit was abandoned in 1991. After poor repayment in the 1992/93 season, the same was being considered for the semi-wholesaler line.



The PRMC channelled funds through the Agricultural Development Bank (BNDA) which provided one-year credits to Village Associations for procuring grain (millet, sorghum, maize and rice) and storing it for sale in the lean season. The Associations are all-village organizations of farmers, where membership is conferred simply by residing in the village. Unlike build up an individually based equity capital which the member may withdraw upon leaving the Association. In this case, the stock was not used as security, but there was a sort of village guarantee, i.e. the village's future access to credits was conditional upon repayment.

Up to the 1990/91 season the PRMC had lent the Village Associations FCFA1.7 billion (about US$6.2 million). Of this 77 percent had been repaid by 31 January 1992 (see Table ]). The loans have yielded significant benefits, particularly to farmers in mono-crop surplus producing zones who had traditionally experienced cash-flow problems, and who had been able to sell at higher prices in the immediate post-harvest period. However, much of the credit was poorly targeted at districts with little need for this form of credit, and at weak associations. Non-repayment is largely on account of misappropriation by village leaders.

The weakness of many Village Associations appears to be due to the heterogeneity of their all-village membership and the diversity of the interests which have to be represented, including surplus producers, deficit producers, and households of different occupations and ethnic origins. This exacerbates "free-rider" problems which typically affect co-operative-type organizations, and leadership tends to gravitate towards those in existing village and civil hierarchies. According to well-informed sources, members are typically apathetic and are poorly informed by their leaders. Where repayment records have been good this can largely be attributed to two factors: heavy and probably unsustainable supervision by development factors: heavy and probably unsustainable supervision by development organizations; and the village guarantee referred to above, which affected the entire village's future access to bank credit.

TABLE 1 Mali: PRMC credits disbursed and unpaid, to 31 January 1992

Type of client Year began Total value disbursed to 1991 - approx (US$ millions) Percentage unpaid to 31 Jan 1992
Wholesale traders 1986/87 4.7 17
Semi-wholesale traders 1987/88 3.0 13
Farmers organized into Village Associations 1988/89 6.2 23

Note: PRMC also provided a loan guarantee so that conventional marketing credit could be extended from the traditional clientele consisting or parastatal companies to private traders but this facility was withdrawn in 1990.

It is concluded that in some cases there is good cause for supporting collective storage by farmers, but it should not be a generalized prescription. In a country where the State no longer seeks to stabilize farm revenues, assistance to Village Associations has been successful in shifting the responsibility for this to the farmers themselves. However, it is increasingly recognized in Mali that the groups most likely to succeed will have a common purpose, e.g. in marketing surplus produce, rather than be village-wide organizations whose members have a variety of interests.



One other lesson from the Malian schemes is that mechanisms for targeting credit at particular kinds of trader, or at farmers in preference to traders, can easily prove futile.

The criteria for being a "semi-wholesaler", as opposed to a "wholesaler", were widely evaded. It might have been simpler to make loans self-targeting, by seeing interest rates at a level which would discourage traders who could already obtain unsecured loans or who had sufficient bank collateral of other forms.

A similar observation can be applied to the PRMC's policy of delaying the disbursement of loans to traders until after the Village Associations had been funded, to prevent farmers from "overselling" their produce. Such policies interfere with the banks' Iending decisions and, by preventing traders from procuring early in the season when prices are cheapest, diminish their contribution to price stabilization. The PRMC appears to have been caught between two contradictory objectives, on the one hand to get the market processes moving and, on the other, to protect farmers from their operation.


Case Study 4 - "Action-research" on trade financing in Ghana

In Ghana, NRI has promoted the financing of the maize trade through inventory credit, and sought to apply lessons learnt in Mali. The term "inventory" credit was, however, already familiar in Ghana, because of a scheme the NGO TechnoServe had been organizing with farmer cooperatives (see next Case Study). NRI's approach was conceived as a complementary initiative, which would make this form of credit available on a much wider scale to whoever could make good use of it. While not being targeted at small farmers, it was designed to benefit them by reducing inter-seasonal price variability.

Two basic principles were to be emphasized: profitability and confidence. Inventory financing should be promoted as a potentially profitable activity to help banks increase their clientele, and capture deposits from the informal trading sector. The role for Government would be to provide a consistent policy framework where banks would feel more confident about lending their ordinary funds. Reliable storekeepers were to be found, so that the banks could ensure the physical security of produce pledged as security.



A feasibility study, carried out in March-April 1993, showed that there were extraordinarily high inter-seasonal price fluctuations in the maize belt of Brong-Ahafo region, with prices in the two highest months averaging 120 percent above the two lowest months, in real terms. Traders rarely stored grain for more than a few weeks, and this was attributed to their lack of contact with the banks, and the impact of earlier Government policies, which made them afraid that stocks would be seized on the grounds that they were "hoarding". The Ghanaian maize system was studied, and different categories of farmers and traders were categorized according to their potential as customers for inventory credit.



In early May 1993, a Seminar was organized by the Ministry of Agriculture, with the support of the Overseas Development Administration (ODA) and the World Bank, and interested parries were invited, including Government officials, banks, traders, maize farmers, poultry farmers, TechnoServe and two candidates for the storekeeping role. These were the Ghanaian subsidiary of the multinational inspection company Société General de Surveillance (Ghana) Ltd (SGS), which was already operating warehouses in the ports, and the Ghana Food Distribution Corporation (GFDC), the grain trading parastatal. GFDC had a network of modern silo facilities but, having exhausted its working capital, was unable to fill them, and was therefore interested in a new role as a supplier of grain drying, cleaning and storage services.

The outcome of the Seminar was an enthusiastic acceptance of the inventory credit concept as presented by NRI and a number of interested parties present, particularly the banks, agreed to implement the proposals. No external funding was to be provided by donors, as banks were considered already to have sufficient liquidity to start lending. NRI was to carry out occasional monitoring.



A cautious and sound start was made in the 1993/94 season, and three traders received loans worth approximately US$310000, directly or indirectly as a result of the pilot activity. Loans were initially provided by the Governmentowned Agricultural Development Bank (ADB), with GFDC acting as collateral manager. Initially ADB lent to a single trader and, as this pilot scheme was successful, financed a second trader late in the season, taking a charge on real estate, but with the commitment that inventory credit would be provided in the next season.

Art unforeseen development is that one trader borrowed from a discount house, whose main business is to trade in Treasury Bills. The loan was unsecured, and bore an interest rate significantly in excess of the rate applied by ADB. The operation was favourable in terms of its speediness and the lack of paper work but, due to the high interest rate, ultimately proved burdensome to the borrower, who subsequently sought ADB funding.

A summary of the situation at the end of the first season is shown in Table 2. A comparison of progress in the first and second years, at mid season, is shown in Table 3.

TABLE 2. Statistics of first year of commercial inventory credit, to 31 July 1994, Ghana

  1993/94 season to 31 July
Number of traders having received inventory credit/related financing 3
Other traders being considered for lending 2
Volume of lending (inventory credit and associated loans) in US$ 310000
Volume of grains purchased with credit (tonnes) 5 730
Volume of grain stored under loan (tonnes) 1 055
Number of financial institutions involved in lending 2
Number of other institutions planning to lend in the next season 1
Number of active wan house operators 1
Loan defaults, bad debts to date none

TABLE 3: Statistics of first and second year of commercial inventory credit, to January 1995, Ghana

  1993/94season to March 1994/95 season to January
Number of traders having received inventory credit/related financing 1 11
Volume of grains stored by traders under loan (tonnes) 1055 1477
Number of financial institutions involved in lending 1 2
Number of active warehouse operators 1 2

The volume of grains stored by traders in receipt of loans was small, about 0.3 percent of the country's marketed surplus (estimated at about 320 000 tonnes). However, the total purchased by these traders was much larger, equivalent to nearly 2 percent of this surplus. Over half of this grain was sold to GFDC, which itself sold on contract to the World Food Programme (WFP), for refugees in the north of Ghana. The remainder was almost entirely sold to poultry farmers.

By financing the traders, ADB has, in effect, assisted the parastatal in completing a contract with the WFP. ADB has also provided the working capital for GFDC, so that its purchases have involved an addition to the Corporation's debt. At the same time, GFDC has acted as collateral manager for the traders.

This situation, with the parastalal carrying out two roles, is at odds with the concept originally promoted (see approach (a) in Section 2). Never-the-less, the overall impact has been positive. In the absence of the scheme, the Government of Ghana would have been relatively unprepared for the food emergency, and is likely to have used food aid from overseas. Without the new lending facilities, the traders would have made less than a quarter of their actual level of purchases. At the same time, the activity seems to have made a minor contribution to price stabilization, with farmers observing an increase in maize prices arising from increased purchases by traders in receipt of loans.

Of longer-term significance is the growing interest of banks and traders. Barclays Bank of Ghana Ltd. entered the field in the 1994/95 season, providing an alternative to ADB. By January 1995, a total of 10 traders had received credit from the two bank and, despite a poor harvest, the amount of grain being stored under loan was up by 50 percent. Given Barclays' satisfaction with its pilot initiative, the stage is set for substantially increased lending in 1995/96.

Maize has been the main commodity stored, but traders are also storing dried anchovies and cowpeas. A proposal has also been formulated for the use of inventory credit in the financing of private procurement of Ghana's main agricultural export, cocoa, but has not so far been implemented.




Issues concerning banks

Certain issues have arisen.

These issues appear to be teething problems. Inventory lending is a new activity in Ghana, involving significant speculative risk. Banks need time to work out ground rules and procedures tailored to the needs of this business, and need to disseminate them to their branch staff. Competition for good customers is forcing them to become more flexible in their approach.

The macro-economic situation also affects banks' initiative in developing new forms of lending. With a high level of Government debt, banks have found the market for Treasury Bills to be extremely remunerative, and this may somewhat dampen their enthusiasm for new forms of lending. Concerns about GFDC (see below) are an additional factor.


Issues concerning warehouse operators

GFDC initially tried hard to market its services, with the support of ADB which has broadcast its willingness to fund farmers and traders storing in GFDC facilities. SGS (Ghana) Ltd., also publicized its services, and in the 1994/95 season started holding stock for borrowers dealing with Barclays Bank. No other parties have put themselves forward for the storekeeping role. GFDC's network of silo sites equipped with dryers and cleaners, in good working order, places it at a competitive advantage to all potential competitors.

GFDC seems to have performed well technically, but less satisfactorily in other aspects. Being a State-owned enterprise and the traders' largest single customer, and having a near monopoly in providing grain drying and cleaning services, it has considerable power vis-à-vis the borrowers. This was illustrated by the ease with which it delayed payment to one of the traders in early 1994, and by the large weight deductions applied in the drying of grain for other parties. In late 1994 there was a major dispute with traders about access to drying facilities, at a time when GFDC was using the facilities to supply its own customers. One trader blamed GFDC for causing damage to 130 tonnes of grain.

GFDC has two business activities. Its long-standing business is commercial, involving the buying and selling of maize on its own account. Due to lack of working capital, its main customer is now the WFP, which buys maize in exchange for imported rice by barter. Its other business is the provision of services (i.e. drying, cleaning and storage) to private sector clients; this has developed in the last two years as a result of the inventory credit initiative. Service business can potentially sustain GFDC in the long term, but only needs a small proportion of the 800 staff who presently work for the corporation. Meanwhile, viability of GFDC's commercial activities is heavily dependent upon a continuation of major contracts with the WFP. Such continuity is unlikely, given the apparently transitory nature of the country's food emergencies, and the increasing ability of private traders to supply the WFP direct, without going through GFDC.

NRI's previous observations demonstrate that GFDC has a serious conflict-of-interest between its service activities and its commercial activities, with the former sometimes being sacrificed for the latter. This threatens the confidence of traders and bankers in the inventory credit programme. In response to this, two recommendations were made:



Given the background of previous policies, and the time required to bring about sustainable improvements in agricultural financing, overall progress is highly encouraging. While only 11 traders have so far participated, considerable progress has been achieved without any funding by, or loan guarantees from, donors and for this reason is all the more likely to be sustainable. Given the fact that both banks' pilot lending initiatives have (so far) proved successful, there are good prospects for a substantial increase in lending in the 1995/96 season.

Of even greater significance is the fact that the inventory credit initiative has brought about a major change in official policies towards the private grain trade. Until 1993, there was widespread apprehension about the role of private traders, but they are now regarded as vital links between the producer and consumer, who need to be encouraged so as to make markets work more efficiently. This is evident both in the public statements of officials and, not withstanding the problems noted above, the the way in which private traders are making increasing use of public storage facilities which in the past were reserved for public stocks.

At the same time the success of traders who have obtained inventory credit seems to be having a snowball effect, with the appearance of more traders operating on a relatively large scale. Hitherto, the trade has been dominated by illiterate or semi-illiterate traders who, due to their small scale of operation, have not contributed to inter-seasonal storage. By contrast, some of the new entrants have higher education and technical expertise in the grain trade, making them better able to ensure proper post-harvest handling and delivery against the specifications of larger buyers. Anecdotal information from farmers and traders indicates that the arrival of these larger-scale traders is bidding up on-farm prices.

Nevertheless, as indicated above, there are hurdles to be crossed. The long-term impact depends largely upon the approach adopted by the banks, and upon continued Government support, particularly its willingness to sort out the problems in GFDC and encourage the development of competitive storekeeping services in the private sector.



Case Study 5 - TechnoServe's experience with inventory credit for farmers in Ghana

Starting in 1988 the NGO, TechnoServe, working closely with the Department of Co-operatives and the Agricultural Development Bank (ADB), has been encouraging small farmers to form co-operatives in order to avail themselves of inventory credit with which to store their members' crop, primarily maize, for sale at higher prices in the Iean season. ADB provides loans against the members' stock, at 75-80 percent of the current market price. The grain is stored in a co-operatively owned and managed warehouse, under the dual-key system, with the co-operative holding one key and TechnoServe or ADB the other.

The co-operatives are promoted along classical, voluntary lines. TechnoServe seeks to create genuine member-controlled organizations, and to avoid using loans and hand-outs to obtain quick and superficially impressive results in the field. Before co-operatives obtain loans they are required to demonstrate their commitment by holding regular meetings, registering their co-operative, generating equity funds, and keeping accounts and minutes of meetings.

Since 1992, TechnoServe has concentrated its efforts on 17 farmer groups in Brong-Ahafo, Eastern and Central Regions. Table 4 shows a statistical summary of the programme and of TechnoServe's estimates of the resulting benefits to farmers.

The volume of credit more than doubled between 1992/93 and 1993/94, but fell back in 1994/95 as a result of a poor harvest. Those co-operatives which have used the facility have gained large benefits, and all loans have been repaid. In 1993/94, TechnoServe reported farmers gaining incremental net benefits of 68 percent from their maize sales, and an overall incremental income of 22 percent. Part of the reason for this success is that TechnoServe reoriented its efforts towards Ghana's key surplus area, the "maize triangle" of Brong-Ahafo Region, which is the same area where traders in receipt of inventory credit have also concentrated their activity.

TABLE 4 TechnoServe's inventory credit programme in Ghana

  1992/93 1993194 1994/95
Credits in 000s US$ 33.2 52.3 7.1
Number of groups 5 12 6
Maize stored (tonnes) 200 600 111
Repayment by due date (%) 100 100 *
Average cash/bag:

for participants (US$)

for non-participants







Net incremental benefits:

in US$

in percentage terms (%)







Average bags per farmers 14 19 *
Incremental income (%) 9 22 *

* indicates data not available

Note:Values have been converted from local currency using exchange rates from international statistics published by IMF.

Source: BOAFO (TechnoServe's Ghana Newsletter), December 1994, and personal communication with TechnoServe staff.

Notwithstanding the emphasis on self-reliance, these impressive achievements have involved considerable outside super vision, and assistance in coordinating sales. Many of them would probably not survive without this continuing support. Building strong local co-operatives is a difficult process. There are significant problems of mistrust between villagers, member apathy and, last but not least, the negative effect of past hand-outs and debt-forgiveness by other organizations. Persuading farmers to put their equity into schemes has been a continuing difficulty.

One of TechnoServe's answers to this is to encourage them to move into downstream processing of crops. It is believed that farmers will co-operate more actively if they have a business which keeps them working together throughout the year. There have been significant storage problems, but thanks to outside assistance, physical losses were reported to have been contained at three percent. TechnoServe's other main initiative has been to organize oilseed processing co-operatives, and here it is also planned to include an inventory credit component.

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