Revolutionizing Agricultural Finance Through Collateral Management Companies and Trading Arrangements

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Empowering agricultural finance in Pakistan, a recent seminar highlighted the role of Collateral Management Companies (CMCs) and Pakistan Mercantile Exchange (PMEX) in transforming the sector. By accrediting warehouses, ensuring quality standards, and providing electronic trading arrangements, these institutions aim to enhance funding opportunities for agribusinesses, addressing current financial challenges in the agricultural ecosystem.

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09th March 2019 Warehousing Receipts and Innovative Ways to Fund Agribusinesses Presented by Nasim Beg Pakistan Business Council Seminar - Financing to Support "Make in Pakistan"

Collateral Management Companies Warehouse Receipts and Commodities Trading The value of agricultural crops at current prices is approximately PKR 3 trillion Aggregate bank finance of agricultural was PKR 442 billion at December 2017 (SBP) The present ecosystem is not conducive to agricultural finance; there is now an initiative by the government to address some of the impediments through supportive institutional arrangements Two institutions (both regulated by the SECP), that will provide the infrastructure and support to the banking sector are: Collateral Management Companies (CMCs) duly licenced under Collateral Management Companies (CMC) Regulations 2017;and Pakistan Mercantile Exchange (PMEX) Pakistan Business Council Seminar - Financing to Support "Make in Pakistan" 2

Collateral Management Company A Collateral Management Company (one under formation at this stage) is entrusted with: Accrediting warehouses that meet the criteria of having credibility, as well as the expertise to sort and store agricultural produce to certain minimum standards Enlisting the services of Specialist companies to be used to certify quality/grading of the produce being stored Ensure that all necessary collateral management arrangements such as insurance, inspections, etc. are in place Act as the depository for the Warehouse Receipts (WHR) covering the deposits by the farmers/depositors of the agricultural commodities at the respective warehouses, under its accreditation, Authorise respective warehouses to deliver the commodities to the holder of the WHR Pakistan Business Council Seminar - Financing to Support "Make in Pakistan" 3

Trading Arrangements PMEX currently provides trading arrangements for several commodities, including some agricultural produce The current structure for the agricultural produce is a pilot arrangement, whereby there are selected warehouses that are storing the produce The produce is traded at PMEX, as well as, settled through PMEX CMCs will take over the responsibility of issuing the Warehouse Receipts in electronic form, such EWRs will be eligible for induction into a Central Depository System and become CDS-eligible securities Pakistan Business Council Seminar - Financing to Support "Make in Pakistan" 4

Electronic Warehouse Receipts The under-formation CMC is in the process of tying up with experts, where after it will get a formal licence from the SECP and gradually roll out the accreditation of warehouses for different agricultural produce in different locations nationwide An Electronic Warehouse Receipt (EWR) will be issued by the CMC to the depositor of the produce; which will have all necessary details of the commodity, such as the quality/grading, etc., that will enable it to be traded at PMEX The EWR issued by a Collateral Management Company is be transferable only upon endorsement of such CMC and shall entitle the lawful holder thereof to receive the Produce specified in it on the same terms and conditions as the original depositor/owner/seller/transferor The claim to the underlying commodity represented by an EWR, is transferred when the issuing CMC records its transfer to a new owner in its software system (this change is instantaneous). Pakistan Business Council Seminar - Financing to Support "Make in Pakistan" 5

Bank Financing of Agricultural Produce If an EWR is endorsed or is pledged in favour of a bank in the CMC s record, that bank can provide finance against the EWR The bank will have the comfort of having the underlying commodity as collateral, which it can take delivery of or sell through PMEX should the need arise; Additionally, the bank will be able to manage the price movement risk through adequate margining, as there will be continuing and transparent price discoveryat PMEX Pakistan Business Council Seminar - Financing to Support "Make in Pakistan" 6