Credit risk

Guarantee of credit risk: the orientation of the dynamic intervention of NIRSAL to facilitate the financing of agriculture

Agriculture continues to be a fundamental instrument for sustainable development and poverty reduction (World Bank, 2008); Yet financial constraints within the agricultural sector remain pervasive and costly, while scarce available resources are distributed inequitably, severely limiting the ability of smallholder farmers to produce and compete in a globalized market.

The Central Bank of Nigeria and other institutions working in the Nigerian agricultural sector have identified six critical challenges facing agriculture in the country, namely a) broken agricultural value chains, b) a lack of understanding of agriculture by the financial sector, c) perceived high risks, d) lack of collateral (at least in terms of conventional collateral), e) complex loan appraisal processes, and f) high transaction costs for the lender and the borrower.

NIRSAL Plc is the product of modern strategic thinking regarding agricultural development in Nigeria. Its intervention aims to provide an inclusive approach to increasing lending by reducing credit risk through guarantee support, reducing agricultural risk through insurance, improving capacity through technical assistance and reducing market risk through value chain development and market access. To this end, NIRSAL’s Credit Risk Guarantee Facility (CRG) is activated for the value chain. Agricultural value chain (AVC) finance offers opportunities for cost reduction and risk sharing for both financiers (counterparties) and farmers (obligors)

In addition to sharing credit risk and offering technical assistance to commercial banks, NIRSAL provides lenders to agriculture while evaluating the effectiveness and social impact of these loans. The government is also working to provide an enabling fiscal and regulatory environment for banks and agricultural value chain actors. For NIRSAL CRG subscribers, a subsidized guarantee fee of only 1% fixed per annum on principal and outstanding protected interest applies. Additionally, as a repayment incentive, up to 40% of interest charges are refunded provided the loan remains in good standing (no partial or full default).

All crop, livestock and related supporting economic activities across the agricultural value chain are supported by the NIRSAL CRG facility. Smallholder farmers, a dominant force in the Nigerian agricultural landscape, as well as other value chain actors are also supported through NIRSAL’s technical assistance pillar. Thanks to it, borrowers are better able to meet their loan obligations while developing their agro-industrial activities. The risk is not only shared through the guarantee facility, but also through a focus on risk management including improved loan appraisal, technology support with a suite of ICT capabilities on the ground and promoting value chain linkages and off-take agreements. Over the years, this financing approach has seen little to no collateral default.

According to Aliyu Abdulhameed, Managing Director/CEO of NIRSAL Plc, since its inception in 2013, “NIRSAL Plc has facilitated CRG-supported facilities of over N163 billion to various players in the agricultural value chain for mechanization activities, distribution of inputs, primary production, processing and marketing of agricultural products”. Regarding this figure, more interventions are taking place in the mid-segment of the agricultural value chain where the injection of finance into processing facilities stems from the activities of the pre-upstream segment. Inputs and other services are consolidated from pre-upstream for eventual production at the upstream segment. The Downstream segment becomes the consolidating link markets.

Abdulhameed adds that “with over 748 current and past beneficiaries of the NIRSAL Credit Risk Guarantee Facility (CRG), NIRSAL has pioneered many proof-of-concept projects that demonstrate and domesticate new agribusiness ideas.” These innovations will help to include more smallholder farmers and provide them with affordable finance as part of the portfolio commitments made by various banks on the back of the CRG facility.

In scaling up its concepts, NIRSAL continued to use market-driven approaches, adopting integrated value chain-based models and layering robust risk reduction mechanisms to enrich the content of its CRGs, thus strengthening the confidence of financial institutions in lending to agricultural actors. This has led to the creation of at least 360,000 direct jobs with an impact on approximately 1.8 million lives. Projects supported so far relate to primary production, processing, logistics and input supply, with smallholder farmers being the majority of beneficiaries. The impact has increased their income and improved their standard of living.

Confirming the direction of NIRSAL’s dynamic intervention in facilitating finance along the agricultural value chain, Abdulhameed, speaking at the Premium Times National Agriculture Symposium on the theme “Fixing the Agricultural Value Chain agricultural value,” noted that the de-risking of Nigerian agriculture through innovative financing has accelerated. industry growth over the past five years. This has facilitated the facilitation of $66.3 million in financial flows to agriculture from local commercial banks, international financial institutions and development partners through NIRSAL’s efficient and transparent deployment of its Fund Sharing Facility. risks of 300 million dollars.

Looking to the future with optimism and assured of NIRSAL’s solutions, commercial banks have pledged a total of $500 million to finance agriculture and agribusiness in the short to medium term. The multiplier effect of this will undoubtedly result in greater financial inclusion for smallholder farmers, SMEs and other actors in the agricultural value chain. It will also increase NIRSAL collaborations that will lead to the replication of tested and scalable models to increase agricultural productivity, create employment and wealth opportunities for farmers and other value chain actors.

Beyond issuing carefully crafted credit guarantees for agricultural projects, NIRSAL has indirectly inspired a greater flow of finance and investment into the agricultural sector. Many, without necessarily seeking the NIRSAL CRG, have taken a new impetus to develop their agro-industrial activities thanks to the renewed attention that the sector is receiving. This contributed to the deliberate change in the rate of bank lending to agriculture from 1.4% when NIRSAL was established to 4.8% in the third quarter of 2020.

NIRSAL is committed to continuing its engagements with the leaders of depository banks (DMBs) and other financial institutions to raise awareness of its activities and the credit risk guarantee mechanism.