Why NIRSAL is a Game Changer in Agriculture Financing

Nathan Ajene Paul

Agriculture is by far the largest sector in the Nigerian economy. It’s potential to become the main driver for more equitable income growth, compared to oil and gas sector has never been in doubt. It accounts for about 42% of Gross Domestic Product (GDP) with about the highest potential for employment generation, food security and poverty reduction. According to a UN Report, the sector has enormous potential – with an opportunity to grow output by 160%, from $99 billion to $256 billion by 2030. This growth potential is estimated to come from potential to increase yields to 80-100% of benchmark countries; increase acreage by 14 million hectares of new agricultural land, approximately 38% of Nigeria’s unused arable land of 36.9million hectares; and a shift 20% of production to higher value crops.

However, one of the major issues that have prevented the sector from unleashing its full potentials and contributing fully to a stronger Nigerian economy and assuring those that engage in it of a decent source of livelihood is the limited access to finance because of its high perception of risk by commercial banks.

Now, as the Buhari administration strategizes to re-set and re-orient the nation’s economy away from oil to the non-oil sector, one key Central Bank Agricultural financing initiative with the most potential to ignite fundamental and sustainable change in the Agriculture sphere – is the Nigerian Incentive-Based Risk-Sharing for Agricultural Lending (NIRSAL). NIRSAL was established in 2011 based on learnings from the gaps that were noticed while implementing earlier credit guarantee programs which failed to have the desired impact. It was designed to encourage the growth of bank lending to the agricultural sector by providing risk mitigation, financing, trading and strategic incentives and technical assistance to Agribusiness with a start-up capital of N75 billion provided by the Central Bank of Nigeria in partnership with the Alliance for a Green Revolution in Africa (AGRA).

NIRSAL is different from earlier agricultural credit guarantees because it is structured to incorporate all major stakeholders along the nodes of agricultural value chain such as input producers, farmers, agro-dealers, agro-processors, industrial manufacturers and exporters.

Its innovative framework fits into the vision of President MuhammaduBuhari to revive the agriculture sector. It also aligns with the energetic development focus of the Central Bank Governor, Mr. Godwin Emefiele to boost local production, create jobs and fortify the economy against exogenous shocks.

Besides the brilliant principles that define NIRSALs model for Agriculture financing, the agency also has a seasoned Agricultural economist and competent technocrat with over 22 years’ experience in the industry Mr. AliyuAbbatiAbdulhameed as its pioneer Managing Director to ensure that the vision of the President is realized under the leadership and direction of the CBN Governor. Mr. Abdulhameed who was appointed MD of the agency in December 2015, holds a BSc. Master of Public Administration (MPA) Executive Masters Certificate from in Public Policy and a BSc (Agric. Econs). He has since his appointment being working hard with few staff to get NIRSAL fully functional so that it fully integrates into the Buhari and CBN strategy for agricultural revolution. And it is promising because NIRSAL by design and implementation has all the trappings to be the ‘Game Changer’ in Agricultural financing in the country. And the reasons are not far-fetched.

For one, NIRSAL is structured to reduce significantly the risk of banks’ lending to the Agricultural sector through its risk sharing vehicle. NIRSAL guarantees up to 75 percent of agriculture bank loans. It pays about 50 percent of losses incurred to large farmers and roughly 75 percent to small and medium scale farmers. By doing this NIRSAL is fixing albeit slowly the problem of low lending to the Agricultural sector which stands at an abysmal 1.4% of the country’s total lending. This lending rate is far below the lending ratios that apply in other high performing developing countries such as Brazil, Mali, Burkina Faso that lend over 10% to agriculture as a percentage of their total loans.

Second, NIRSAL provides comprehensive insurance products for agricultural lending to help reduce credit risks and increase lending across the entire value chain by providing farmers with a substitute for collateral. This it does by expanding the coverage of existing products provided by the Nigerian Agricultural Insurance Corporation (NAIC), the country’s de facto agricultural insurance monopoly, and piloting and scaling new products, such as weather index insurance, new variants of pest and disease insurance. For instance, under weather index insurance, farmers receive a payout if rainfall is outside pre-defined pay-out bands.

Third, NIRSAL provides technical assistance by equipping banks to lend sustainably to agriculture. This is alongside assisting producers to borrow and use loans more effectively, and to produce more and better quality goods for the market. This intervention is significant because it addresses the issue of limited understanding of agriculture by banks which leads them to have sometimes exaggerated perception of the risk of lending to Agricultural as higher than it is. It also helps it to fix bank’s credit assessment process which is very poor.

Offering technical Assistance will improve the function of the agricultural financial value chain through building capability for lending and borrowing and encouraging linkages along the value chain.

Overall for Lenders & Insurers, NIRSAL’s provision of technical assistance will help to build capability to assess agricultural risk and to develop and distribute agricultural friendly products. For Borrowers the assistance will help to build their capability to better access loans and increase capacity to improve productivity.

Fourth, NIRSAL provides a holistic bank rating mechanism that is based on the effectiveness of their agricultural lending and its social impact. The mechanism will measure lending and social outcomes. Lending takes 80 percent, while its social impact will take 20 percent based on NIRSAL’s goals. This weighting reflects the understanding that while banks cannot be held accountable for the social impact of their lending, it is within their powers to structure loans that are more likely to have social impact.

Fifth, NIRSAL has a bank incentives mechanism which offers banks additional incentives to build their long-term capabilities to lend to agriculture. To qualify, the investment must cover a tangible fixed asset or intellectual property investment designed to help the bank significantly increase its agricultural lending capability. The most innovative ideas will receive a non-cash award for “Innovation in Agricultural Lending”. Financial support will be capped at the total value of the award and at 50 percent of the value of the investment.

To foster competition among the top ten banks, the awards are made on a sliding scale. The top prize – “Agriculture Bank of the Year” – is USD 3.25 million. When a bank wins an award, it must submit a proposal within three months on how it will invest in building its agricultural lending capabilities. Proposals are reviewed and approved by an independent panel and eligible types of investment include: Branch expansion to rural areas within a high-potential value chain (up to 50 percent of total cost); Establishing IT platforms that support agricultural lending; Agricultural credit risk scoring models; Platforms for distributing loans using technology such as mobile phone.

Earlier credit schemes to the Agricultural sector failed to have the desired impact because they did not take into cognizance the full scope of the Agricultural value chain. They failed to see as one whole linked process the agricultural challenges which range from underfunded research and development, financial risks for farmers who do not understand talk less of adopting best practice. They also did not factor in other issues like threats from disease, pest, climate, and poor farmer extension services, lack of local storage and processing, lack of market linkages and limited formalization of retail.
And this is where NIRSAL is different. It is also a key reason why it will succeed where others failed to make the desired impact as a ‘single bullet’ strategy for building a sustainable financing model for agricultural financing.

NIRSAL integrates end-to-end agriculture value chains with agricultural financing value chains. Under the agriculture value chain it connects input producers, farmers, agro dealers, agro processors, industrial processors, trade and exports. On the side of the agricultural financing value chain, it facilitates loan product development, distribution, loan origination, credit assessment, managing and pricing for risk, loan disbursement and management. By doing this in a systematic and institutional fashion that is transparent and in line with international best practice, NIRSAL is able to expand lending to each part of the agricultural value chain.

NIRSAL clearly stands out as one of the most creative, innovative and sustainable agricultural financing programs in Nigeria. Even though NIRSAL has from 2012 operated as a Project Implementation Office within the Development Finance Department of the CBN until December 2015, it has been able to make significant impact in the industry in spite of manpower limitations. NIRSAL has provided Credit Guarantees for over 454 Agricultural projects valued at N61.161 billion. It has also paid out over N753.36 million as interest rebate to borrowers who paid back their loans in good time. Furthermore, NIRSAL has through its technical assistance scheme trained over 112,000 farmers across the country on best practice farming techniques and business management. This is a promising sign of the future potential of the initiative when fully staffed and organized.

– Nathan is a public policy analyst