Inclusive Warehouse Receipt Financing Pilot For Ginger In Nepal- Technical Brief, Key Results And Lessons Learned

Background:

Government of Nepal (GoN) has identified ginger as one of the top 15 value chains^[1] based on its potential for reducing poverty, growth and income generation, positive impact on environment, inclusion and gender equity and number of households involved in cultivating etc. Globally, Nepal is the third largest producer of ginger^[2] and Palpa district in Nepal is one of the major production hubs. Nearly 90% of ginger produced in Nepal is exported^[3], however, despite this strong export potential smallholder and women farmers are often not able to take advantage and benefit from higher profitability mainly owing to two reasons. Firstly, during harvest season ginger prices are often low (the farm gate price for ginger was as low as NPR 30-40 cents in 2019) but smallholder farmers are compelled to sell their produce at lower price as they don’t have access to safe storage options and often experience high storage losses upto 30% when stored using traditional methods. Secondly, smallholder farmers are often in need of cash following the harvest to meet their consumptive and other needs like repaying debts, buying inputs for the next farming season etc. These two barriers, i.e., lack of access to safe storage and credit needs limit smallholder farmers ability to hold their ginger produce for few months and sell it when the prices are more attractive and increase their profitability.

Pilot Concept:

To address these twin barriers, CRS and Caritas Nepal piloted Warehouse Receipt Financing (WRF) in Tansen rural municipality in Palpa district. It needs to be noted that Agriculture Development Strategy (ADS) 2015-35 of GoN has recommended development and implementation of WRF as an agricultural finance product to facilitate profitable commercialization. Under this model, farmers can use their produce as a collateral to get credit from designated financial institution. The produce is stored in a well maintained and secure warehouse thus reducing the chances of storage losses and theft etc.

CRS, in partnership with Caritas Nepal, has been working on strengthening ginger value chain in Palpa district since 2019 which started with an inclusive value chain study on ginger ^[4] followed by a multi-year project for capacity strengthening of 600 farmers on improved ginger production and marketing practices. CRS is also collaborating with Purdue University under USAID Feed the Future Food Systems for Nutrition Innovation Lab (FSN-IL) to reduce storage losses in fresh ginger by scaling up cost-effective storage solutions in Palpa. These initiatives provided CRS with a thorough understanding of the ginger sub-sector, the key systems actors and paved way for piloting WRF for ginger which is the first time in Nepal for an agriculture commodity.

Key Stakeholders:

Given that WRF is a new concept in Nepal and there is no existing policy framework from GoN, the project convened and facilitated formal agreements between key stakeholders like the financial institution, ginger growing farmer groups and Tansen rural municipality with well-defined roles and responsibilities as given below, 

• Tansen rural municipality provided land, and co-funding to the tune of 50% for the construction of warehouse and committing to cover operational expenses like electricity and water for five years. Additionally, the municipality has deputed agriculture technical staff for regular monitoring and support.
• Milansar Samajik Udhyami Mahila Sahkari Sanstha Ltd (a women-led cooperative) is responsible for the day-to-day operations of the warehouse which includes crucial aspects like inspection of stocks, quality control, temperature, humidity and hygiene maintenance, documentation, farmer relationship management, providing market price information to farmers and helping them with marketing etc. The cooperative also provides credit to the farmers against the value of stock. 
• Farmer groups lead creating awareness and sharing information about WRF among their members and also facilitate activities like grading, and collective transportation. 
• Nepal Agricultural Research Council – Ginger Research Program (NARC GRP) provided technical support for the design and management of warehouse.

Considering that warehousing is a very new concept, the project developed comprehensive guidelines for storing agriculture produce upon request of the municipality which was later approved by the municipality executive board. In line with the guidelines, the project formed a “Management Committee” consisting of representatives from the credit cooperative, ward and technical staff from the municipality itself. The Management Committee meets are regular intervals to take stock of the progress including warehouse visits for quality monitoring. 

With land and 50% co-funding from Tansen rural municipality amounting to approximately NPR 50,00,000 ($37,000), a minimum energy requirement warehouse with a capacity of 25,000kg was constructed in Tansen municipality of Palpa district and fitted with necessary equipment like racks, air conditioners, wind-powered ventilation fans etc. The warehouse was constructed under technical guidance from NARC GRP and Agriculture Knowledge Centre (AKC) of GoN.

The Process:

Step 1: Upon harvesting, farmers undertake basic cleaning, curing, and grading exercise for the ginger clearly segregating them into Grade A, Grade B and Grade C with Grade C denoting the lowest quality. The graded ginger is packed in plastic crates designed specifically for vegetable storage.

Farmers are provided with comprehensive orientation and training on safe harvesting, grading, cleaning, packaging process and the importance of storing disease and damage free ginger to prevent high storage losses.

Step 2: Farmers bring ginger to the warehouse where technical staff from cooperative inspects the ginger to validate grading, ensure quality adherence and weigh. Upon satisfactory quality inspection, the farmer is provided with a receipt clearly mentioning his/her name, registration number, grade and quantity of ginger stored, and its value based on current market price. Similarly, the crates are also labelled to ensure that they are not mixed up between farmers. An agreement is signed between the farmer and cooperative clearly mentioning the storage costs (NPR 3 per kg) and other terms and conditions.

While the warehouse had a storage capacity of 25,000kg, the target for the pilot project was kept at 5,000kg for the first year. This was to initiate the pilot at a scale that is less risky and manageable for all the stakeholders involved.

Step 3: Based on his/her financial needs, the farmer applies for loan at the cooperative. It is not mandatory for the farmer to take loan and he/she can only opt for the paid storage service. This provision is built in for the first year to allow farmers more flexibility. The cooperative approves and provides loan maximum to the tune of 80% of the amount as decided by Management Committee and grade of ginger stored. Loan documentation is completed between the cooperative and farmer.

For Grade A, the maximum loan limit is 80% of the stored ginger value and for Grade B and Grade C, it is 70% and 60% respectively. In consultation with cooperative, the eligibility criteria for loans were modified to include non-members to provide access to finance for the excluded groups. To popularize WRF, the cooperative is charging 12% annual interest rate which is 1% lower than its other loan products. The project also supported the cooperative in developing documentation templates and process for WRF product.

Step 4: The cooperative tracks the market price of ginger and provides regular updates on the price and buyer details to farmers who have stored ginger in the warehouse over phone. Additionally, the cooperative also monitors ginger quality and informs farmers in case of more than permissible level of moisture loss or any fungal infection. All this information allows farmers to decide when and where they want to sell their stock.

Step 5: When farmers decide to sell, they are free to repay the loan, get their stock released and sell it in the market. Alternatively, they can ask the cooperative to sell the stock on their behalf, deduct the repayment amount and return the balance.

When farmers take their stock from the warehouse, the ginger is weighed again, and the weight loss is documented. For any weight loss of more than 20%, the cooperative pays NPR 40 (30 cents) per kg to the farmer. The cooperative has brought this provision temporarily as a risk covering mechanism and encourage farmers to participate and take advantage of WRF mechanism.

Step 6: Upon on satisfactory completion of all the transactions, clearance of dues, the cooperative issues a no-dues letter to the farmers making them eligible for further loans.

Key Results:

• WRF has significantly strengthened the negotiation leverage for farmers as they are no more compelled for distress selling. Earlier farmers were selling for a lesser price even if market prices were high as they didn’t have safe storage options and were vary of deterioration in ginger quality.
• Encouraged by the first-year results, the municipality has approved and allocated additional budget ($750) for FY25 to provide financial incentives to farmers, ensure full capacity utilization and popularize WRF model. The incentive will be in the form of NPR 5/kg to cover storage rental.
• Subject to second-year results and demand from farmers, the municipality has expressed its willingness to replicate WRF in other locations within their jurisdiction.
• Most of the farmers, who have taken loan from the cooperative, have used the money to buy quality and adequate agricultural inputs for the next season.
• Many farmers are used to delaying harvesting of ginger when the market prices are low. As a result, they were not able to plant second crop as the field was already under ginger crop. With affordable, safe and effective storage facility through WRF, farmers are harvesting on time and taking advantage of the second crops like mustard.
• Women tend to play a larger role in the storage, inspection and maintenance (like sun drying intermittently in case of fungus and high moisture) of stored ginger at the household level which is a time and labor consuming process. With ginger stored at the warehouse under close supervision from technically competent staff, women shared that they are less worried about the quality of ginger and have more spare time for other activities.

Lessons Learned:

• WRF is an agriculture financial product which is generally considered suitable for semi-commercial, commercial farmers and traders having large surplus stock. The project’s strategy of encouraging smallholder and women farmers with minor surplus production (upto 50kg) to pool their produce and register under one farmer name for WRF has ensured inclusion and benefited marginal farmers. 
• Project’s intentional strategies of reaching out to smallholder and women non-members resulted in a first-time engagement with cooperative for many farmers. Given the positive experience they have had, and willingness expressed, this is a great opportunity to facilitate their inclusion in the cooperatives as formal members and shareholders to formalize their association with cooperative and increase their access to other plethora of services offered by the cooperative.
• The average storage period of two months was less than what was expected. Such small storage period was also one of the reasons for majority of farmers not taking loan. A more advanced meticulous planning and awareness generation by the cooperative is required to facilitate timely harvest, and storage.
• Marketing support provided by the cooperative like regular price updates, identification of buyers and selling ginger on behalf of farmers was highly appreciated by farmers especially women farmers. This is very likely to be a strong motivating factor for farmers to take advantage of WRF. Additionally, the cooperative can also collect commission for this in future to serve as a source of income for them.
• WRF will be more effective if farmers have skills, capacities and access to inputs for production of high-quality ginger. Hence, WRF should integrate extension activities with focus on production and productivity improvements including harvesting and transportation.
• As many farmers are willing to store Grade A and B ginger which can be sold as seed for higher price, there is an opportunity to train and support farmers in adopting seed protection practices using organic alternatives like neem (Indian lilac) leaves, ash and timur (Zanthoxylum armatum or Sichuan pepper).

Conclusion:

With these promising results, the pilot project has demonstrated the strong potential WRF has to facilitate financial inclusion and contribute to higher profitability for farmers.  WRF is generally perceived as an agricultural finance product which mostly benefits large farmers, wholesalers, aggregators and traders. However, this pilot has demonstrated that with innovative and locally appropriate strategies, WRF can be made more inclusive especially for women. WRF has a strong potential to facilitate financial inclusion for smallholders who are particularly engaged in high value crops like ginger, large cardamom, lentil, and oil seeds and take forward the ADS vision aiming at profitable commercialization. In coming years, CRS intends to further consolidate these results, learnings and share with wider audience to scale WRF to include other geographies and agricultural commodities as prioritized in the ADS of GoN.