When a bank or financial institution extends a loan to a borrower in Tanzania, it is critical that it must obtain adequate collateral commensurating with a loan advanced. A collateral can be in the form of an asset or property created and issued by a borrower in favour of a bank or financial institution, and which by way of a disposition, can be converted into cash, if a borrower defaults in servicing the loan.
Further, the Banking and Financial Institutions (Credit Concentration and Other Exposure Limits) Regulations of 2014, requires whenever a bank or financial institution (conducting banking activities in Tanzania) advances a loan or a credit accommodation to a borrower, it must demand adequate collateral for such facility.
Different types of collaterals are required or used depending with the nature and structure of a loan financing transaction. It must be noted however that, an adequate collateral is one which is free from any encumbrance (unless the ranking of a lender is appropriately prioritized), and it is adequate enough to hedge a bank’s or financial institution’s associated loan risks.
In Tanzania, the traditional form of collateral mostly preferred by a bank or financial institution in a loan financing transaction are a debenture instrument, a mortgage deed over landed property, a share pledge, and an individual or corporate guarantee. Overtime, these have become part of loan documentation. In addition, a debenture instrument and a mortgage deed have become security documents of choice for most lenders. This is primarily due to the flexibility they provide on enforcement, that is, without having to go through the court process, anytime there is a default by the borrower (or security provider) of the terms thereof. This is because the terms of a debenture instrument and a mortgage deed would ordinarily state how they will be enforced directly upon default.
Lately, there have been deliberately efforts from the banking and financial institution fraternity to also apply commodities through the warehouse receipts system under Warehouse Receipt Act, No. 10 of 2005, Chapter 339 of the laws of Tanzania, as amended from time to time (hereinafter referred to as the “Act”), as an additional debt collateral component in order to broaden their collateral portfolio base. This has been the case since agriculture continues to be the main part of Tanzania’s economy and majority of its citizens are involved in farming - which makes agricultural commodities contribute largely to the country’s foreign exchange earnings from cash crops exports. In addition, there is currently a well-established and defined warehouse receipt system (“Warehouse Receipts System” or “WRS”) in Tanzania, which has now formalized the existing marketing system by minimizing various constraints hampering effective production and marketing of agricultural produce.
We must point out that in the past, some banks and financial institutions applied letters of hypothecation as collateral instruments for movable property or agricultural produce. However, since these did/do not have an established regulatory regime, and they were also susceptible to risks and enforceability challenges, the majority of banks and financial institutions did not tag along to apply them.
A warehouse receipt is defined under the Act as a receipt issued by a warehouse operator or a collateral manager in respect of storage, handling or shipment of commodity.
This written document serves as evidence of title to the stored goods, similar to a certificate of title for landed property or a motor vehicle registration card for a motor vehicle or a share certificate for a share(s).
Warehouse Receipt Legal Regime
The WRS is regulated by the Warehouse Receipts Regulatory Board (“WRRB”) which is primarily tasked with regulating and promoting the WRS to ensure that there is a fair and sustainable accessibility to formal credit and commodity marketing systems. All the primary players (as shall be described below) are regulated by WRRB, as a result, for all due diligence investigations issues which a bank or a financial institution must conduct at the point of establishing and registering a collateral for a loan, are now implemented at the WRRB.
Generally, the WRS denotes a trade by which commodities, such as, coffee, tea, maize, sesame etc., are stored in a licensed warehouse(s) and the owner thereof receives warehouse receipts which will certify the title of the deposited commodities. The Warehouse Receipt System facilitates storage and future trade and access to credit by way of securitizing the commodities stored in a licensed warehouse, without necessarily moving the said commodities from the licensed warehouse.
The warehouse receipt is therefore a document issued by a warehouse operator or a collateral manager, stating among others, (a) name and the licensed warehouse operator or collateral manager, (b) grade of warehouse, (c) identification number of unit of goods stored (d) number of packaging, net weight or volume of goods and (e) fees chargeable as lien on the stored goods. This particular document, is printed by WRRB in tripartite, with the first copy being marked as the ‘Certificate of Title’, the second copy being marked as ‘Certificate of Pledge’ and the third copy as a ‘Book Copy’ for record purposes. The Certificate of Title indicates ownership of the commodities, while the Certificate of Pledge copy is what is used by a bank or financial institution as collateral where a borrower (owner/depositor of the commodities) is advanced a loan by it.
It is important to note that the WRS is not a mandatory platform for people or entities who wish to use warehouses and goods therein as collateral. A person is at liberty to use a private unlicensed warehouse for purposes of obtaining credit with the commodities therein as collateral. However, warehouses registered/licenced by the WRRB are regulated, thereby giving more comfort to the users, and therefore hedging a lender against any unforeseeable risks, since registered warehouses are required to meet certain thresholds standards for them to be licensed by WRRB.
Warehouse receipts are suitable collaterals for a bank or financial institution because the underlining collateral is ring fenced in a way that gives them control through collateral managers (who primarily will administer and control the commodity goods stored in the warehouses). In addition, and subject to how a bank or financial institution will structure the underlining collateral, normally, commodities will be stored in a licensed warehouse and will be charged as security for a loan issued to a borrower (owner or depositor). Consent from a bank or financial institution to release the charged commodities will only take place once it receives payment from the sale of the commodities by the owner (borrower) to the buyer. The structure above gives banks or financial institutions the leverage required to control the commodities pre- and immediate post-sale. It should be noted however that, there are other collateral structures that are used different from the one mentioned above.
It is our general opinion therefore that, as part of the standard collateral documentation, a bank or financial institution (plus any other foreign lender or financier) should seriously consider using warehouse receipts when structuring loan transactions to broaden their collateral portfolios, among other reasons.
In order for the WRS to work effectively and efficiently, it must have certain key primary players. These players are derived from the WRS value chain, such as, (1) Depositor; (2) Collateral Manager; (3) Licensed Warehouse; (4) Licensed Warehouse Operator; (5) Buyer; and (6) Financial Institution.
Further, we should also mention at this juncture that the WRRB is empowered to issue a notice of commodities applicable under the Act. This list is periodically updated by the WRRB and currently includes coffee, raw cashew nuts, maize, paddy, sesame, sunflower, pigeon peas and cotton. We recommend that a bank or financial institution should periodically check the list to ensure that the collateral that a bank or financial institution desire to secure is a licensed commodity.
We have taken the liberty to explain below the primary players in the WRS value chain and the warehouse system legal regime in general, since their involvement in the system is vital, significant and unavoidable.
Depositor
A depositor is any person who deposits a commodity in a warehouse for storage and who is the legal owner of or holder of the outstanding warehouse receipts.
The following are some of the functions of any Depositor of the commodity under the WRS:- (a) to collect, winnow, dry, sort, clean, primary grading and packaging according to approved standards; (b) to transport the commodity to the Licensed Warehouse with the support of legal document such as produce delivery note; (c) to fully observe all steps in quality certification, weighing and staking of the commodity; (d) to check the correctness of the issued document (Quality Certificate, Commodity Received Note and Warehouse Receipts) after the commodity has been received by the warehouse operator; (e) to agree on the content of the written Warehouse Receipts and sign therein; and (f) in the event finance is made against the stocks, the Depositor is required to submit the Certificate of Pledge to the financing institution.
Collateral Manager
A collateral manager has an integral part to play in the WRS value chain, such as, verifying funding from a financial institution and ensuring that the borrower (depositor) applies funds for agreed purposes, verifying insurance arrangements, verify quality, issue or verify warehouse receipts, tally-in, weighing, stacking and counting bags, verify quality, administer and control goods, supervise of export processing, quality control and goods match.
Buyer
A buyer is any licensed company, legal person who gives an offer and accept to purchase (contract) the commodity in the Licensed Warehouse. Any buyer who holds outstanding Warehouse Receipts is the incumbent depositor of the respective commodity and has all proprietor’s right. A buyer has the following major functions in the WRS (a) To agree on the content of the written Warehouse Receipts; (b) to make payment of the commodity purchased; (c) to acquire Certificate of Title and Certificate of Pledge from the depositor or agent; (c) in the event finance was made against the commodity, the Buyer is required to collect Certificate of Pledge and Release Warrant from the Financing Institution; and (d) the Buyer is the custodian of the Warehouse Receipts (Certificate of Title and Certificate of Pledge) after buying.
Financial Institution(s)
The Act provides for a financial institution to acquire proprietary right of the commodity if it has a binding commitment to extend a loan whether or not drawn. A financial institution having a proprietor right of the commodity does not extend to the power of selling the commodity during the time of storage as indicated in the Warehouse Receipts.
A financial institution has the following major functions: - (a) it is a payment point for all financial transactions made under this system. In any case cash payment is strictly prohibited; (b) to finance commodity trade under the system. The finance can be made to depositor, buyer, warehouse owner and warehouse operator by considering the particular nature of the business in question; (c) to provide training on procedure and requirement for any financing facility under this system; and (d) to provide information to the WRRB as may be demanded from time to time.
Licensed Warehouse
The Licensed Warehouse is defined by the Act as “any warehouse for which the WRRB, subject to other terms and requirement of the Act, has been issued with a License”. This License is termed as Warehouse Business License. The License when issued, extends to buildings used in relation thereof, such as offices, sample room, laboratories, weighbridge, conditioning and processing rooms and all enclosures inside the fenced area related to commodity under which the License was issued. A Licensed Warehouse is where the commodities are stored.
Licensed Warehouse Operator
A warehouse operator is a legal person engaged in the business of operating a warehouse for checking quality, receiving, storing, and delivering according to the instructions of the owner of the commodities and upon receipt of the prior, issue Warehouse Receipts and other required documents.
Other Stakeholders in the Warehouse Receipt System
There are also other stakeholder players, such as Warehouse Inspectors, Insurance Companies, Transporter and Suppliers to mention but a few.
Conclusion
Lastly, Tanzania has a commodity market known as Tanzania Mercantile Exchange (TMX) which is the first commodity exchange in Tanzania. TMX began operations in 2018, with a goal to increase access to markets for buyers and sellers of commodities in Tanzania.
The exchange is established as a platform where farmers, traders, exporters and other various market actors are able to access domestic and global market and obtain a fair price in selling or buying of commodities. TMX is an organized marketplace, providing a platform where buyers and sellers come together to trade - assured of quality, quantity, payment, and delivery. That said, owners of commodities (depositors) can easily and readily sell their commodities through the TMX market. Likewise, buyers can now easily buy such commodities from the said market instead of the previous crude process of going through different warehouses to find such commodities or having to use agents (intermediaries) to source them.
Note: This is not a legal opinion and the contents hereof are not meant to be relied upon by any recipient unless our written consent is sought and explicitly obtained in writing.
