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Banks and Agriculture Funding in Nigeria

02 Nov 2011

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The future of the agricultural sector of the nation’s economy is faced with several uncertainties such as inadequate funding, resource scarcity, heightened risks from climate change, higher energy prices, demand for bio-fuels and doubts about the speed of technical progress. Eromosele Abiodun writes on recent efforts by the Central Bank of Nigeria (CBN) and banks to boost the funding of agriculture

In the sub-Saharan Africa, agriculture occupies a prominent position in national economies as the sector serves as a key driver of growth, wealth creation and poverty reduction. It is also the leading economic activity in the continent as it contributes between 20 per cent and 30 per cent of its Gross Domestic Product (GDP).


According to the World Bank, about 70 per cent of Nigeria’s estimated 150 million people live on about $1 per day. In other words, about 105 million Nigerians live below the poverty line, with 35 per cent of this number classified as living in absolute poverty. The United Nations Human Poverty Index in 1999 scored Nigeria 41.6 per cent, effectively situating it amongst the 25 poorest nations in the world.


The bulk of people trapped in the poverty web dwell in rural areas, which holds about 80 per cent of the national population. Their primary occupation is agriculture. Nigeria earns over 80 per cent of her revenue from the petroleum industry, according to several reports, but the sector actually accounts for less than 14 per cent of the GDP, whereas agriculture commands an impressive 41.8 per cent of GDP and generates two-thirds of employment nationwide.


Here then is the paradox: about 90 per cent of Nigeria’s food requirement is produced by small-scale farmers who constitute the majority of the nation’s poor. A myriad of factors are blamed for this  condition, both natural and man-made. Key is lack of access to finance and the resultant inability to invest in basic farming inputs such as seedlings, fertilizers, implements and irrigation. As a result, their yields have remained largely stagnant, leading to pervasive hunger and poverty. Similarly, little or no commercial financing is available to those aspiring to build businesses that could enhance food production and enable farmers to earn sustainable profit.

OECD, UNCSD
Speaking at the 4th African Rural and Agricultural Credit Association (ARACA) conference in Abuja last year, Governor of the Central Bank of Nigeria (CBN), Mallam Lamido Sanusi, put the state of the farming sector in perspective.


His words: “Agriculture occupies a priority status in the national economy as the sector serves as the key driver of growth, wealth creation and poverty reduction. It is the leading economic activity in sub-Saharan Africa as it contributes 20 to 30 percent of its GDP. However, the future of agriculture in sub-Saharan Africa is clouded with several uncertainties that include increasing resource scarcity, heightened risks from climate change, higher energy prices, demand for bio-fuels and doubts about the speed of technical progress.


Sanusi further disclosed that, the annual demand for agribusiness financing over the next 40 years was projected at $6.5 billion per annum, compared to the current annual fund supply of $1.5-$5 billion. “This presents a huge financing gap which a forum such as this should be able to critically examine and develop policies and implementation frameworks to minimize the gap in the interest of agricultural development in the region.”


According to him, in Nigeria, the banking sector reform has direct bearing on the development of the real sector as it seeks to position the banking system to contribute to the growth and development of the various sectors of the economy.


He said the spirit of the reform was anchored on the fact that real economic growth must be supported by actual rise in physical goods and services. He added that the reform had sought to break from the classical orthodoxy of leaving the allocation of financial resources to the market forces.


He said: “Rather, the reform has identified priority sectors and developed tailored interventions to support and promote growth in these sectors. Some of the key interventions in the real sector under this reform pillar include: the N200 billion Commercial Agricultural Credit Scheme (CACS); the N300 billion power and aviation intervention fund; the N200 billion Restructuring/Refinancing to the Manufacturing Sector/SME; the N200 billion Small and Medium Scale Enterprises Guarantee Scheme (SMECGS).


“The CACS was established by the CBN in collaboration with the Federal Ministry of Agriculture. It is being funded through the issuance of FGN Bond worth N200 billion, by the Debt Management Office (DMO) in two tranches. The first tranche of N100 billion had been raised and passed on to participating banks for on-lending to farmers. Loans made under this scheme are at single digit interest rate subject to a maximum of 9.0 per cent, while the CBN bears the interest subsidy at maturity.”


Sanusi noted that the scheme was initially established to promote commercial agricultural enterprises but was later expanded to accommodate small-scale farmers through the on-lending scheme of the state governments.
He added that the sum of N96.81 billion had been disbursed to 104 projects through 11 banks and 18 state governments including the Federal Capital Territory (FCT) as at end of December 2010.

Funding Needs
But the apex bank governor said  the current funding needs of the sector were largely due to its peculiarities.
“The peculiarities are long gestation periods for agricultural production; the risks and uncertainties from natural causes and the predominance of small scale producers with little asset base and working capital,” he declared.


He said the formal banking system in the continent did not have the capacity, skills and resources to single-handedly finance the expected exponential growth in the agric sector.


In view of these, he said there was need to evolve strategies to attract long term financing in the form of bonds, debentures and venture capital funds.
He recommended that regulatory and legal reforms be undertaken in order to empower corporate investors such as trusts and insurance companies, pension funds and other institutional investors to provide sustainable long term fund through instruments such as bonds, warrants, leases as well as equity.


He said, “globally, agric business has changed drastically and we must blaze the trail or lose relevance. The greatest challenge, therefore, is to cultivate a new set of agricultural entrepreneurs to drive the technological changes in the sector and make the continent competitive and food secure.
“In specific terms, there is the need to provide coherent policy to guide implementation of financial and support intermediation and evolve packets of support services to suit different levels of financial services, ” he said.


He stressed that there was need to reposition agriculture, as the sector still had the potential to transform the economy, adding that the CBN was collaborating with the banks to address the problems along the value-chain.
The CBN boss lamented that despite the sector’s 45 per cent contribution to GDP, only one per cent of the entire banking sector credit went to agriculture owing to its inherent risks.


He, however, pointed out that efforts were being made to de-risk the sector through the creation of value-chain covering the entire production and marketing processes capable of generating employment and income.
“We have to unlock the value chain for agriculture to be viable, we don’t have marketing boards, and the commodities board in Abuja is not working. So, it is very easy to blame the banks for not lending into the real sector but you have to have a right policy that will make viable counterparties available to the banks,” he said.

OECD, UNCSD Efforts
The situation is not different at the continental level. The Organisation for Economic Co-operation and Development (OECD) stated at the 16th session of the United Nations Commission on Sustainable Development (UNCSD-16) in 2008, that about 216 million people, translating to one out of every seven persons in Africa, are classified as undernourished. This is the condition of people whose dietary energy consumption is continuously below a minimum requirement for maintaining a healthy life and carrying out light physical activity.


Compared  this situation with the billions of tax payers’ money allocated to agriculture every year and the fact that most Africans depend on agriculture for livelihood. Yet again you need to pause to ask just how much funding agriculture gets in Africa, whether it is from public allocations, Direct Foreign Investment (DFI), private investments or as assistance from multilateral organisations. The answer surprisingly is, too little.


Even though 75 per cent of Africa’s poor live in rural areas and are dependent on the agricultural sector, bilateral and multilateral aid to agriculture accounts for less than 4 per cent of total development assistance. This share declined from 5.2 per cent in 2000 to 3.4 per cent in 2006. The largest decrease has been in agricultural aid from bilateral donors, from 3.7 per cent of Official Development Assistance (ODA) in 2000 to 2.5 per cent in 2006.

Standard Bank, AGRA Alliance
This situation has heightened the agitation for local financing initiatives. One local financing initiative likely to become a turning-point for the continent is the partnership between Standard Bank Group and the Alliance for a Green Revolution in Africa (AGRA), a dynamic partnership working across the African continent to help millions of small-scale farmers and their families lift themselves out of poverty and hunger. Standard Bank has teamed up with AGRA to create an innovative fund for Africa's smallholder farmers. The fund operates in Ghana, Mozambique, Tanzania and Uganda, opening loan opportunities to smallholder farmers and small- and medium-sized agricultural businesses previously considered too risky for lending.


AGRA and other partners are providing a guarantee fund, and in turn, Standard Bank made $100 million available for lending over three years.
Chief Executive of the Standard Bank Group, Mr. Jacko Maree, in a chat with journalists recently stated that the large share of agriculture in Africa's GDP suggests that strong growth in agriculture is necessary for overall economic growth.


“There is a need and an opportunity for investment that will develop the middle ground in Africa's agriculture. Africa has enormous natural potential and the continent has to unlock this potential in order to reap the benefits of its natural resources”, he stated.


"As a leading emerging markets bank, our goal is to perform a transformative role in the continent's agricultural sector in partnership with other organizations. Transforming small scale farmers into medium-sized enterprises is essential to address food security and to stimulate economic growth," Maree explained.


The initiative, he explained, builds on Standard Bank's funding models developed to finance small-scale farmers.
“These models also include risk mitigating tools such as price hedging instruments and crop insurance. The lack of usable collateral makes traditional lending products inappropriate, “he said.

Stanbic IBTC’s Intervention
In Nigeria, a member of the Standard Bank Group, Stanbic IBTC, in acknowledging the nation’s huge agricultural resource base and the great potential it offers for growth of the economy, is increasingly priming itself to empower the Nigerian farmer.


Head, Agriculture, Stanbic IBTC Bank Plc, Mr. Jacques Taylor, in a chat with THISDAY, stated that this goal of empowering farmers would be achieved through bespoke schemes and initiatives currently being implemented by the institution.


The bank, he added, was also working with a number of government agencies and multilateral organisations to spearhead a true agricultural revolution in Nigeria leveraging the Standard Bank group experience and expertise in agricultural financing.


“In addition, the CBN is working with AGRA and other key stakeholders in Nigeria to develop an innovative financing mechanism, tagged Nigeria Incentive-based Risk Sharing System for Agricultural Lending (NIRSAL), which will provide farmers with affordable financial products, while reducing the risk of loans to farmers under other financing programme offered by the financial institutions.

A new financing framework for agriculture, NIRSAL is a risk sharing system for agricultural lending. This model of financing agriculture is different in many ways from the current model, which has not yielded the desired impact of making adequate credit available in the sector, “he said.
The bank, he stressed, was also looking forward to participate in the CBN’s NIRSAL programme.


He said: “NIRSAL is a demand driven credit facility rather than the current supply driven funding. It would adopt a value chain approach to lending and banks would be free to choose, which part of the chain they would be interested in lending. It would build the capacity of banks to engage and deliver loans by providing technical assistance, reduce counterpart risks facing banks through innovative crop insurance products, reward performance in agricultural lending and would be managed with performance based incentives.”


According to him, NIRSAL would pool the current resources in CBN’s agricultural financing schemes and other investor funds and transfer these into the different components of the programme.


“In other words, our existing agricultural financing and insurance scheme would be assessed, modified and integrated into NIRSAL. The initiative will build capacities of banks to expand lending to agriculture, deploy risk sharing instruments to lower risks of lending and develop a bank rating scheme to rate banks based on their lending to the agricultural sector. This initiative will help unlock access to bank finance, critical for stimulating agric lending and increasing food and crop production in Nigeria.”


He further stated that Standard Bank and Stanbic IBTC were driven by the conviction that opportunities exist to provide an end-to-end banking solution for agriculture in which the banks can leverage and cross-sell a full suite of products and services, from traditional commercial banking and lending products to crop and weather insurance products.


Taylor said, “in addition, Stanbic IBTC Bank is growing its branch network in order to bring this suite of products closer to Nigerians. Many of the new branches are situated in agrarian communities, thereby bringing the bank closer to farmers, enabling easier access to finance and other banking services.


“The challenge of financing small farmers, it is said, is more than just the provision of finance; it is also about providing a complete solution to small holder farmers to ensure long term sustainability, food security and higher standards of living.”

Tags: Agriculture, Banks, Business, Featured, Nigeria, NIRSAL, OECD, Stanbic IBTC, UNCSD

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