A Nigerian bank is among the world’s first banks to provide large-scale commodity financing on the blockchain.
Sterling Bank has committed to providing at least N10bn (approximately US$30mn) in financing against a blockchain-based commodity supply chain lending programme.
The bank’s pledge comes as part of an agreement with Afex, a Nigerian commodities exchange, and Binkabi, an Africa-focused blockchain firm.
The partnership will see the three parties work together to streamline the process of financing smallholder farmers. While Sterling Bank will provide the credit, Afex will deliver warehouse facilities and grading services, and Binkabi the platform on which the programme will be run.
Binkabi’s platform uses blockchain-based smart contracts to secure and automate commodity trading and financing. Through the new programme, a farmer can deposit commodities for sale at one of Afex’s warehouses throughout Nigeria, which in turn will issue a warehouse receipt representing the ownership of the commodity. This warehouse receipt will then be converted into a token – what Binkabi calls the “tokenisation of commodities” – which can be traded on Binkabi’s blockchain platform and used as collateral for financiers to fund it.
The whole process, including disbursing funds, monitoring performance and managing repayment is automated through Binkabi’s platform.
The idea is that, by adopting advanced technology, the platform will lower the entry barrier for people wanting to trade commodities: instead of depending on brokers or paying expensive fees for a spot on the traditional trading floor, the decentralised platform will be a place for anyone, anywhere in the world to trade commodities in the form of digital tokens.
It will empower farmers in particular, explains Bukola Awosanya , group head of agrifinance at Sterling Bank.
“Today, the middlemen take most of the income and very little is left to the farmer. With this platform, there is an ability for the farmer to connect to the end-user, and eradicate the middlemen,” she tells GTR.
Meanwhile, the platform will reduce the risk for financiers that wish to lend against the commodities. If a bank decides to finance a commodity through Binkabi’s platform, the borrower would lock their tokenised warehouse receipt in a smart contract, which will give the bank the confidence to lend. If either party in a transaction fails to perform, the digital asset is returned to the sender.
This brings huge opportunities to a bank like Sterling Bank, which has never provided financing on the back of warehouse receipts before. Neither have most Nigerian banks: they tend to only finance agriculture supply chains through balance-sheet lending.
“It will enable us to finance more and provide better pricing,” Awosanya says. “Before, the bank would need additional collateral – something more tangible than a warehouse receipt, such as a mortgage.”
And because many farmers lack this collateral, they struggle to access financing. It typically forces them to sell all their crop at harvest when prices tend to be low.
Addressing this specific problem, the new blockchain-based financing programme will help farmers receive financing to preserve their crop at a warehouse until they decide to sell. It will empower them to conduct more profitable trade and become less vulnerable to commodity price shocks.
Sterling Bank will initially finance grains such as sugar, soybeans, rice and maize, focusing on domestic trade. Binkabi has already signed up more than 100 farmers who wish to trial the platform in Nigeria, and will now be working to attract the country’s processors before going live in early December.
Meanwhile, banks in Nigeria are keen to get involved on the financing side, Manrui Tang, Binkabi’s COO, tells GTR. “We are impressed by how forward-looking some of the banks in Nigeria are. We have been talking to other banks and surprisingly we have received a lot of interest in financing commodities on the back of a warehouse receipt. This has not been done in Nigeria before.”
According to Binkabi, it’s the first time that blockchain has been deployed to lend at scale against commodities.
The firm’s long-term ambition is to build a broad network of individual commodity exchanges across Africa that share a common blockchain-based infrastructure. Because the technology allows for exchanges to easily “plug in” to Binkabi’s technology, it will be more straightforward and cost-effective to set up new exchanges, while at the same time bringing together buyers, sellers and financiers across countries. The aim is to give all farmers in poorer countries more power to hedge price risks and better access funding solutions.
Binkabi is already working with TAK Agro, a local agricultural conglomerate, to acquire a license for another exchange that will run on the same platform.