The recent unveiling of the Nigeria Incentive-Based Risk Management System for Agricultural Lending (NIRSAL) by the Central Bank of Nigeria (CBN) has continued to attract reactions from operators in the finance and agricultural sectors of the economy.
NIRSAL, a N450 billion special credit portfolio, set aside by the CBN as its own contribution to the Agricultural Transformation Agenda of the federal government, according to the CBN, is a dynamic and holistic approach that tackles both the agricultural value chain and the agricultural financing value chain.
The apex bank explained that NIRSAL does two things at once; fixes the agricultural value chain, so that banks can lend with confidence to the sector and, encourages banks to lend to the agricultural value chain by offering them strong incentives and technical assistance.
CBN added that NIRSAL, unlike previous schemes which encouraged banks to lend without clear strategy to the entire spectrum of the agricultural value chain, emphasises lending to the value chain and to all sizes of producers.
Economy watchers said the latest intervention by the apex bank was timely given the growing frustration of farmers who complained of lack of adequate support from the financial institutions on one hand, and banks, whose grouse with farmers was a combination of their misplaced priority, difficulty in recouping their money from farmers and the twin problem of poor infrastructure and lack of a robust agric insurance platform to indemnify banks against risks in agricultural lending.
The centrality of agricultural sector to Nigeria’s economy is underscored by the fact that it accounts for 40 percent of the Gross Domestic Product (GDP) and providing over 60 percent of employment. However, the sector represents only one percent of exports. Over the last decade, agricultural growth has slowed down and today it is under-performing despite enormous potentials.
Experts believe that to reverse the trend, there will be need to tackle some of its major challenges such as low productivity, poor technology and cultural practices, low research and development, and under-financing of the agricultural value chain.
The CBN noted that funding level in the agricultural sector stands at about two percent of the total lending of banks as against six percent in a country like Kenya. Some of the reasons for the low funding include lack of understanding of the agricultural sector, perceived high risks, complex credit assessment processes/procedure and high transaction costs.
The apex bank believes that addressing these issues require an innovative approach, hence the introduction of NIRSAL.
Giving an insight into the operation of the new arrangement, the Head of NIRSAL Project Implementation Office under the Development Finance Department of the CBN, Mr. Jude Uzonwanne, said the guarantee would be issued by the NIRSAL to the farmers in the states and FCT through commercial banks and other financial institutions. He explained, “NIRSAL mobilises financing for Nigerian agribusiness by using credit guarantees to address the risk of default. NIRSAL is a flexible financing tool designed to change the behaviour of financial institutions.
“It covers all crops and livestock activities in Nigeria, while driving improved investment outcomes and job creation. It is also building on a legacy of previous CBN interventions in agriculture that has helped create thousands of jobs.”
He stated that the CBN programme was designed to create access to finance by integrating end-to-end agriculture value chains such as input producers, farmers, agro dealers, agro processors and industrial manufacturers with agricultural financing value chains – loan product development, credit distribution, loan origination, managing and pricing for risk, and loan disbursement.
“The integration is driven by NIRSAL’s five pillars, particularly the risk sharing pillar and the technical assistance pillars such as risk sharing facility (N45 billion), insurance facility (N4.5 billion), technical assistance facility (N9 billion), agricultural bank rating scheme (N1.5 billion), and bank incentive mechanism (N15 billion),” he stated.
NIRSAL is expected to share risks with banks ranging from 30% to 75% of loss depending on the segment.
According to the CBN, six pilot crop value chains have been identified based on existing crop production levels and potentials in six high-potential breadbasket areas. The crops are: tomatoes; cotton; maize; soya beans; rice and cassava.
The initiative is aimed at generating an additional $3 billion of bank lending within 10 years to increase agricultural lending from the current 1.4 to 7 percent of total bank lending. It also seeks to increase lending to the “pooled” small farmer segment to 50 percent of the total (typically, banks do not reach these producers individually but through “pools”, i.e., aggregating mediators, such as MFIs and cooperatives).
Another objective of NIRSAL is to reach 3.8 million agricultural producers by 2020 through pooling mechanisms such as value chains, MFIs, and cooperatives and to reduce banks’ break-even interest rate to borrowers from 14 to 7.5-10.5 percent.
The initiative is expected to lead to increased lending to agriculture from 1.4 to 7 percent of total bank lending within 10 years, increased income, GDP, foreign exchange earnings and the implication on the apex bank’s ability to manage the value of local currency. In addition, the project will absolve the bank of the need for endless and voluminous subsidies to the agricultural sector.
On the part of banks, there will be opportunity to maintain long term human, institutional and cultural capacity for value chain financing capacity and enjoy lower loan origination and distribution costs. NIRSAL is expected to give agricultural producers increased access to credit. It is also expected to bring about enhanced adoption of better cultural and agronomic practices, use of improved inputs like seeds and fertilisers, increased productivity and profit, income, standards of living, job creation and poverty reduction.
Farmers Shun Agric Loans
However, some analysts have urged the CBN to put in place adequate arrangement to make the implementation of NIRSAL work. They argued that rolling out new programmes when previous ones have not been able to achieve the goals for which they were set up may amount to playing to the gallery. Their position was obviously informed by the report that only N37 billion out of the N189.294 billion which the CBN disbursed to money deposit banks for lending to states and farmers’ cooperatives under its Commercial Agriculture Credit Scheme (CACS)has been accessed in the past three years.
The report which was attributed to the CBN governor, Sanusi Lamido Sanusi, was described as quite discouraging, given the efforts of government to assist farmers and diversify the economy.
As part of its developmental role, the CBN, in collaboration with the Federal Ministry of Agriculture and Rural Development, established CACS in March 2009 for the promotion of commercial agricultural enterprises in Nigeria.
Managing Director, Renaissance Group, West Africa, Mr. Rotimi Oyekanmi explained that “The agricultural sector is made of mostly subsistence farming. Therefore it relies on mostly smallholders,” adding that cooperatives is not wide spread in agriculture. Oyekanmi said part of the problem is the land use act which means farmers do not own large tracts of land. According to him, urbanisation and rural –urban migration is also a problem, a development he blamed for the neglect of agricultural practice especially by youths.
Insisting that Nigerian farmers will embrace the use of modern farming techniques once the small holders are helped to graduate to large scale farming, Oyekanmi said:“Our farming is also primitive which is caused by small holders. Where we are able to encourage large scale farming, there will be modernised farming methods and practices.”
He said “The large farmers will be able to work with more small holders thus providing essential support by way of farming methods, irrigation and highbred seeds/varieties.
“As we look for improvements required in agriculture, we need to critically evaluate all aspects of farming and the needs to make farming a viable industry with many successes.
“In my view, funding is not the critical requirement for agriculture to be a success and this is evident by the amount accessed from the funds in earlier facilities as reported.”
He maintained that funds would be accessed by viable businesses that have the ability to repay the loans from their farming operations. “We need to focus on the skills and techniques that are more critical – are we producing at competitive yields? If not, why not? It is when we are producing competitive yields that our businesses can be successful, do we even know what yields are for our products?” he asked.
Another stakeholder who spoke on the latest initiative from the CBN is former president, Finance Houses Association of Nigeria, Mr. Eddie Osarenkhoe, who described as worrisome the problem of the sector over the year.
Osarenkhoe said the effective use of the fund would lead to development, bridge the financial agricultural gap and reduce bank’s perception of agriculture as highly risky.
He said the fund would facilitate easy access to loans and agriculture facilities that would enhance performance in the sector.
According to him, the implementation of the loan would determine the level of the success of the scheme.