Ethiopian Commodity Exchange to help finance agricultural trade

Traders on the Ethiopian Commodity Exchange (ECX – www.ecx.com.et) will be able to use their stocks to access bank finance from January 2010. In the scheme, launched in June 2009 and discussed with stakeholders on 24 September, the ECX and the International Finance Corporation (IFC – www.ifc.org), a member of the World Bank Group, aim to introduce Warehouse Receipt  financing for producers and traders to get bank loans by pledging receipts for commodities held in ECX warehouses.

Agriculture accounts for about half of Ethiopia’s economy (GDP), 60% of exports, and 80% of jobs, according to the IFC, but farmers and producers have difficulty accessing finance due to the type and level of collateral that banks require. Much of Ethiopia’s development strategy is oriented towards agriculture-led growth.

The ECX is seeking to transform agriculture by standardizing key crops and quality and using technology to distribute prices countrywide. Buyers and sellers trade on an open-outcry floor, and the exchange assures quality, delivery, and payment. By holding all crops in warehouses, ECX gives security by providing a secure and reliable end-to-end system for handling, grading, and storing commodities, matching offers and bids for commodity transactions, and a risk-free payment and goods delivery system to settle transactions, while serving all fairly and efficiently. The ECX receipts guarantee the quality, quantity, and security of produce deposited in its warehouses.

In June, the IFC announced that it would support ECX over the next 2 years to design financial instruments and advocate for any required regulatory and legal changes so that banks can accept warehouse receipts as collateral for loans. IFC and ECX will also work together to increase the capacity of banks to extend loans based on warehouse receipts. IFC is giving technical advisory services and financing.

ECX CEO, Dr. Eleni Z. Gabre-Madhin was quoted by a local paper (Daily Monitor) as saying in September that the plan would help farmers who previously did not have enough collateral, and would also cut the costs and risks of lending for banks and helps them tap into a huge unexploited credit market for short-term trade finance to farmers. Financing could help small producers well at better prices, grow their business and invest in infrastructure, including stores.

She is quoted: “The market is currently severely under-financed, with only 6% of traders able to secure formal trade finance and having to resort to unfavorable traditional moneylenders. Essentially, we are about to turn commodity into asset. We should be thinking that every Warehouse is, in reality, a bank branch.” Alemseged Assefa, Vice Governor of National Bank of Ethiopia, was quoted as saying: “The launching of this system has the potential to be nothing short of a revolution in our finance sector”.

The ECX was established by Proclamation in June 2007 and is authorized to trade in both spot and futures contracts, initially starting with spot contracts for immediate delivery. Live trading was launched on 24 April 2008.

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