Processes and challenges of structured trade and commodity financing in Uganda: a case of Ugandan coffee sector

Abstract

The study sought to establish the processes and challenges of structured trade and commodity financing (STCF) in Uganda – a case of Ugandan coffee sector. Specifically, the study aimed at identifying the key processes in accessing STCF facilities in the coffee sector, challenges faced by banks and coffee traders during the key processes of accessing coffee Structured Trade Finance (CSTF) and solutions as to how the challenges can be reduced. A sample of 60 respondents was interviewed. 35 respondents were from the banking sector, 20 were coffee traders and 5 were collateral manager staffs that are the custodians of the bank-financed coffee. Research instruments comprised semi-structured questionnaires, which were used to gather qualitative and quantifiable data from individual respondents. Data analysis was done utilising the statistical program for social sciences (SPSS) and summarised into meaningful pattern for analysis. The major findings were that banks, traders and collateral managers face challenges at major processes of advancing CSTF facilities by banks to coffee traders. Both bank and trader respondents identified challenges during application process, credit evaluation/appraisal process, during credit documentation and loan management and recovery. Some of the challenges identified by banks at above processes included voluminous paper presentation, insufficient information provided by traders, unstandardised information and deliberate submission of wrong information by coffee traders applicants. Others were, long approval periods by parent banks, difficulty of understanding trader’s business idea by bank staff and new market entrants not easily accepted by banks as acceptable risk. Further to this, was the challenges of lack of requisite knowledge and skills by bank personnel in structured trade and commodity financing, lack of reliable updated date, biasness in analysis due to previous sour deals, putting in place amorphous structures, delays in disbursements and capturing receivable from coffee sales, high cost of recovery when called for and delayed coffee stock releases for export by the banks. Suggested solutions to some of these challenges according to research findings included banks acting as business partners to guide and coach potential coffee customers on information requirements, training generally in Structured Trade and Commodity Financing (STCF) as a methodology of financing and particularly CSTF, training against biased analysis, identify and becoming partners with coffee organisations for credit source of reference information, hiring competent personnel with tested and proven record in CSTF, creation of specialised units to handle CSTF and training lawyers in STCF to guard against possible default caused by deals not well structured, ring fenced and water tightened by legal documents. Challenges to third parties (collateral managers), who are responsible for control and monitoring the financed coffee on behalf of the bank and the trader as an independent party, were identified as delayed coffee stock releases, mis-match of presented coffee stocks and collusion with coffee trader’s representatives. Solutions to these included constant coffee stock reconciliation and having in place sufficient professional indemnity insurance cover. It was recommended that for STCF as a general concept to develop and specifically CSTF these challenges must be addressed with a concerted effort of all stakeholders in the transaction.