WRF an alternative route to achieve the target quickly

By Shabbir H. Kazmi


Efforts of State Bank of Pakistan (SBP) to implement Warehouse Receipt Financing (WRF) in Pakistan are applaud able and needs to be supported by all the stakeholders. This essential but timely initiative is part of financial inclusion program being pursued by the central bank.

Once fully implemented, WRF system will be extremely beneficial to the farmers and support in realizing top of the agenda item, achieving food security. This program one hand will help in containing wastages significantly, and on the other hand, enabling Pakistan to export surplus produce to those countries that need it the most.

Experts are of the consensus that the development of commodity physical trade and an efficient market system is a must for improving the performance of the agricultural sector in particular and the economy in general, the added advantage is documentation.

However, while going through initial reports regarding plan being considered by the designated working group constituted by the central bank, one gets a feeling that a rather complicated system involving too many participants is being proposed.

A closer look at the existing trading system of commodities like wheat, rice and cotton shows that not only too many intermediaries are involved but the available warehousing system is not to the level required for WRF system.

The detailed discussions with various stakeholders suggest that for the pilot project a product should be chosen that has relatively longer shelf life, quality standards are easy to certify, quantity to be handled can be monitored, appropriate warehousing facilities are available and above all commercial banks has the experience of extending credit against the selected commodity.

Keeping all the above stated factors in mind sugar can be picked as the first commodity to start WRF in Pakistan. The available data suggests that an elaborate and fully documented system is being followed in sugar trade. All the mills have reasonably reliable warehouses and sales are fully documented because of payment of GST.

Stock position is closely monitored by the commercial banks as these extend billions of rupees credit to the mills against hypothecation of stock. Mills submit daily stock reports to banks and physical stocks are checked with regular intervals to avoid any movement of stock without proper documentation.

Therefore, it may be said that since banks have been lending money against hypothecation of stock, sugar industry is a perfect test case to follow WRF system. The beauty of the system is that mills have long experience and expertise of collateral management and there may not be any need to induct additional collateral management company at this stage.

The added advantage is that Pakistan Mercantile Exchange (PMEX) is already working closely with some of the sugar mills to introduce trading of ‘mill specific deliverable sugar contracts’.

All the stakeholders have shown keen interest in participating in trading of sugar at PMEX. This on one hand will free the government from buying sugar through TCP in case of glut, and on the other hand, commercial banks will not be lending any additional funds.

Therefore, deliverable contracts can be changed into warehouse receipts and PMEX’s state-of-the-art technology based platform can be used for trading.

A closer coordination among the representatives of PMEX, sugar mills, apex regulators and commercial banks can lead to the commencement of trading of warehouse receipts in the shortest possible time.

Let one point be very clear to all the stakeholders that during the recently concluded sugarcane crushing season mills have produced over 5 million tons refined. The estimated value of the available stock is around Rs300 billion or US$3 billion based on international price of the commodity.

Mills have already acquired money from banks through hypothecation of stock and the amount involved can be confirmed from banks. The next move will be to convert these loans into warehouse receipt financing.

Once SECP approve these, trading of warehouse receipts can commence immediately as PMEX already has the required trading system in place.

One may say that according to my proposal the beneficiaries will be sugar mills and not the farmers. The perception has to be corrected because the ultimate beneficiary will be sugarcane growers as mills will be able to pay them off at a much faster pace. The added advantage is, they will not have to borrow from the informal sources and pay very high interest rate.


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