Lending constraints removed for Nigeria's agriculture sector

As the government turns to the agriculture sector to boost economic growth, there is a greater emphasis on access to credit and financing for the industry. This stems from the awareness that more funds, in terms of both loans and grants, need to be supplied to the sector in order for it to reach its full potential.

Adding Up

Financing has been a consistent challenge for agricultural producers and processors in Nigeria. Traditionally, the commercial banking sector has been used as a primary lender to the sector; however, this has proved inadequate. In the fourth quarter of 2015, for example, commercial banking loans extended to the agriculture sector represented just 3.4% of total banking loans, according to the Central Bank of Nigeria (CBN). Furthermore, the cost to borrowers is high; interest rates for agricultural loans often exceed 20%. As recently as 2011 borrowing costs for agriculture entities were as much as 18 percentage points above those for other industries, according to the World Bank.

As this suggests, bringing greater capital into the sector is a challenge. “Nigerian banks do not understand agriculture, and are not willing to take steps to do so because the current lack of organisation and low technical know-how in the industry do not encourage financial institutions to view agriculture as a worthwhile investment,” Ibinabo Anabraba, co-founder and CEO of Daso Food Industries, told OBG. “This is where private investors need to step in.” The sector often has long payback periods and suffers from unpredictable productivity. Moreover, banks often do not have access to collateral, given that many farming enterprises have no formal titles over their land. The agriculture sector has also been associated with high non-performing loan ratios and difficulties in loan recovery.

Given these risk factors, it is perhaps unsurprising that credit is expensive in the sector. Furthermore, in the current inflationary environment it is difficult for the banking sector to offer low-cost financing. The CBN benchmark rate itself is set at 14%. Therefore, there is not that much room for commercial banks to bring down the cost of borrowing.

For large-scale enterprises, there are opportunities beyond the local banking sector, including international financing. However, this also comes with significant risks. “Local funding lines are very important, even if they come at a higher cost, because of what can happen to the exchange rate,” Prakash Kanth, vice-president for corporate affairs at Olam Nigeria, told OBG. As such, many local producers and processors have little option but to look to local commercial banks where lending decisions are made on a case-by-case basis.

Path To Growth

While the constraints to lending might be somewhat understandable, it is clear that limited financing represents a severe impediment to the industry. One recent academic study found a strong correlation between commercial banking loans to the sector and real GDP from agriculture. It found that an increase of 1% in commercial loans to the sector would increase agricultural real GDP by 1.9%.

However, given the constraints in the financing environment, most efforts to boost funding to the industry have come from public initiatives. The latest plan announced by the federal government in April 2017 looks to inject N3trn ($10.6bn) into the Bank of Agriculture to allow the lender to offer farmers credit at affordable interest rates. Set up in 1972 and fully owned by the federal government, the bank is the primary vehicle for disbursing publicly backed loans to commercial farmers and smallholders. It has offered financing at the comparatively low rate of 12% for microfinancing and 14% for small and medium-sized loans.

The government is touting the new injection of capital as a game-changer for the institution and the sector. Audu Ogbeh, the minister of agriculture and rural development, told local press, “Once we restructure the Bank of Agriculture, the interest rate will not exceed 7%. I am pushing for 5%. The average rate worldwide is 3%; it is only in Nigeria that we are doing 18-25%.”

The attempt to bring down the cost of borrowing is likely to lead to greater lending activity. In the last decade the bank has lent N41bn ($144.9m) to 600 enterprises, and has provided N3bn ($10.6m) in lending to 12 states. These figures will have to increase substantially in order for the bank’s activities to have a transformative impact on the sector. “Agriculture activities are receiving a lot of attention from the government, but we need a comprehensive medium- to long-term plan for the sector in order to develop our capacity,” Ade Adeniji, managing director of Starlink Global, a Nigeria-based agricultural produce firm, told OBG.

ABP

Prior to the latest announcement, the Anchor Borrowers’ Programme (ABP) was the government’s flagship agricultural financing initiative. Launched in the last quarter of 2015, the programme seeks to offer loans and farm inputs to smallholder farmers producing key crops in a bid to scale up and commercialise their operations, and connect them with large-scale processors. These smallholders are able to access loans ranging in size from N150,000 ($530) to N250,000 ($884), and should allow farmers to access seeds, pesticides and fertilisers to push up yields.

The CBN distributes funding to participating financial institutions using the N220bn ($777.5m) Micro, Small and Medium Enterprises Development Fund. These institutions access the funds at a borrowing rate of 2%, and lend to farmers at a rate no higher than 9%. Given that the central bank benchmark rate stands at 14%, the programme offers credit at a substantial discount to the commercial banking sector. During the first year of the programme the CBN disbursed almost N27bn ($95.4m) across 17 states. According to initial reports, the scheme is having a noticeable impact on production. The borrowing programme has reached rice farmers accounting for 2.5m tonnes of annual rice production, or 55.6% of the country’s total output. The central bank believes the ABP will have a dramatic impact on the local economy, and has set a target of creating at least 1m jobs in the processing segment through the scheme by 2020.

Industry Support

The programme has largely received the support of the industry. Both the Manufacturers Association of Nigeria (MAN) and the National Association of Small Scale Industrialists have come out in support of the ABP. “The scheme is good. Any programme that will encourage local production either in agriculture or other area is a welcome development,” Frank Jacobs, the president of MAN, told the local press in February 2017. “It has helped create jobs for many farmers and other investors.”

The ABP and the plans for the Bank of Agriculture mark a substantial departure in terms of sector financing. The schemes are bolder and more ambitious than the smaller, piecemeal programmes that have focused more narrowly on particular funding and financing challenges. These include the Rice Intervention Fund, a loan programme targeting processing facilities; the Agricultural Credit Support Scheme; the Fund for Agricultural Finance in Nigeria, which works with small and medium-sized enterprises; the Commercial Agriculture Credit Scheme; and the Nigerian Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL).

This last initiative was established as a means of dealing with the risk profile facing banks that lend to the sector. NIRSAL provides public funds to insure the commercial banking sector against potential losses from agricultural lending. This has been a critical and persistent problem that has not only constrained the commercial banking sector, but also public lenders.

For example, the Bank of Agriculture has complained about a low loan recovery rate and how defaults have negatively impacted its operations. Aliyu Abbati, the managing director of NIRSAL, has targeted N60bn ($212m) in new commercial bank loans to agriculture in 2017 as a result of the initiative’s coverage. “The agricultural sector is significantly improving both in terms of its output and its diversification, but government policies must be consistent to ensure this is sustained,” Mukul Mathur, country head for Olam, told OBG.

Foreign Funding

A raft of foreign funding also complements these domestic initiatives. In 2017 alone the local agriculture sector will be supported by a $4.5bn loan from the Chinese government and $200m worth of credit from the World Bank. The former will be extended over 20 years at a rate of 1% and will be disbursed to the states for the procurement of agricultural machinery, such as tractors, bulldozers and irrigation pumps. The World Bank financing will be used to support small and medium-sized farm operations, and will dovetail with the $400m the agency has already committed to the market.

While this donor financing has long been a characteristic of the market, the government’s attempts to pump liquidity into the local industry represent a potential step change. Agricultural producers and processors have long suffered from a tough financing environment. If new loans at affordable rates can be disbursed widely across the sector, it should provide new opportunities for greater productivity and commercialisation.