Most people do not stop to think about how important trust is to make a market system work. We usually do not stop to question whether there is really soap in that box we just picked up in the store isle. But, when you stop and think, there had to be trust at the retail level, the wholesale level, the manufacturing level and the input level. In business, trust has to be earned and it does not just happen.
Now what has this to do with my last assignment in Malawi? I am an experienced volunteer agricultural economic consultant and I was asked to help develop a warehouse receipt system for agricultural commodities in Malawi. A warehouse receipt system lets farmers put their commodity, say maize, in a warehouse, get a warehouse receipt, use the warehouse receipt to get a bank loan, then later in the year when prices have probably risen, sell the commodity and pay off the loan. Does this not sound like a great system? Well, yes, but it takes trust by all the players before they will use it, the producers, the warehouse owners, the bank and, the commodity buyers. And it does not just happen.
The producers have to trust the warehouse. The warehouse gives them a piece of paper and they have to believe the commodity will be safely stored. The bank has to trust the warehouse; the receipt says there is a specified quantity of commercial grade commodity available for delivery to the holder of the receipt. The bank holds the receipt as collateral, the producer, the warehouse, and the buyer have to believe it will be delivered at the sale of the commodity.
In most cases, trust builds out of past performance. But when a new system is introduced, like a warehouse receipt system in Malawi, past experience is not available. In fact, experience from poorly thought out systems in other countries in Africa show some negative experiences.
Malawi is lucky, there is a third party that is not a producer, warehouse owner, banker or final commodity buyer that is both promoting warehouse receipts and acting as the “trust” element. Agricultural Commodity Exchange for Africa (ACE), is playing the role of “honest broker.” They are working with producer representatives, warehouses, bankers, and final buyers. They are injecting trust by setting standards and then acting as the clearing house to all transactions. In time, they plan to make their role sustainable by charging a small clearing house fee based on the final sale price.
ACE is carefully selecting warehouses that they believe are experienced with protecting the physical commodity from insects, moulds, thieves and poor management in general. Further, they require them to have storage insurance. ACE is working with banks to assure them of the quality of the warehouses and helping to write standard loan contracts. ACE, acting as the clearing house, has all transactions go through them. The commodity is delivered and the warehouse receipt is written, but it goes through ACT.
The loan is between the bank and the producer, but it goes through ACE. When the commodity is sold, ACE is there to assure the producer, the bank, the warehouse, and the buyer that each acts according to the contracts.
At the time the commodity is sold, the buyerâ€™s money flows through ACE and ACE sees that it is properly divided between the warehouse, the bank and the producer, all according to contract. The warehouse receipt flows through ACE from the bank to the buyer and then back through ACE to the warehouse and the commodity is delivered.
This may all seem arcane to the person on the street, but it is the lubricant, the trust that results in an economically efficient system. It is a case where an honest broker helps create trust in a system of contracts.
There is a saying going around the development community that say, “Trade Not Aid.” It says development should be about building economic systems that benefit people and are sustainable. I believe this Malawi warehouse receipt system is a good example. I am pleased that I have played a small part in moving it forward.
â€”The author is a retired professor and agricultural marketing consultant.