Agricultural Commodity Financing in Kenya

Agricultural Commodity Financing in Kenya

The agriculture sector is very important to the Kenyan economy contributing directly to 26% of the gross domestic product and another 27% indirectly through linkages with other sectors while providing a livelihood for more than 80% of the Kenyan population. The financing of agricultural commodities in Kenya using warehousing receipts has been muted in the absence of a legal framework and arrangements between parties have been contractual. This note highlights some of the key provisions in the proposed Warehouse Receipt System Bill 2018 which is before Parliament.

The Warehouse Receipt System Bill 2018 seeks to provide a legal framework for the development and regulation of a warehouse receipt system for agricultural commodities in Kenya. The preamble suggests that its focused on the cereals and grains sub-sectors in Kenya, but the Bill elsewhere provides that agricultural commodity means all agricultural produce as determined by regulations to be the subject to the Bill.

The Bill designates a warehouse receipt as a document of title. A warehouse operator will be under a mandatory obligation to deliver the goods described in the receipt to the holder of the receipt (unless he can prove the existence of a lawful act for the refusal or failure to deliver the goods). The receipt according to the Bill may take either hard copy or electronic form and the Bill sets out the mandatory information that must be contained in it. The Bill proposes penalties against warehouse operators who fraudulently issue receipts or issue receipts containing false statements.

The Bill proposes the establishment of a Central Registry in which any transaction relating to a warehouse receipt (such as issuance, assignment or loss) may be registered. Upon registration, a certificate of registration is proposed to be issued as conclusive evidence of that issue or negotiation of the warehouse receipt. According to the Bill, the warehouse receipt may be negotiable by endorsement, delivery or assignment for value. The provisions relating to negotiation of the receipt appear contradictory in the Bill as they also refer to negotiation by purchase or transfer and the use of terms is not consistent.

The Bill will also require the licensing of warehouse operators by a council to be known as the Warehouse Receipt System Council. The Bill recognises that a warehouse operator will have a lien on the goods in his possession or on the proceeds of those goods for lawful charges in the storage contract. A key concern for creditors may be that the Bill does not propose that warehouse operators provide performance guarantees or to take mandatory insurance. A requirement for insurance may be implied by the proposal that the warehouse receipt contain a statement that the commodity is insured by the warehouse operator for the full valuer thereof.  Another issue is that the Bill does not contain an enforcement mechanism and it does not create any prioritisation of a receipt-holders claim in liquidation proceedings. Additional registration following the negotiation of a receipt to a creditor may therefore be necessary in order to grant priority to that creditor.

The provisions of Bill may change as it goes through Parliament and it remains to be seen what it will look like once enacted.

For any further information, please write to:

Sammy Ndolo
Managing Partner
Kieti Advocates LLP

This legal alert is issued to inform Kieti clients and other interested parties about legal developments that may affect or otherwise be of interest to them. The commentary above does not constitute legal or other advice and should not be regarded as a substitute for specific advice in individual cases. Kieti Advocates LLP is a limited liability partnership registered in Kenya under no. LLP-4EL1A8.