Credit Risk Guarantee: The thrust of NIRSAL’s dynamic intervention in facilitating finance for agriculture

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Agriculture continues to be a fundamental instrument for sustainable development and poverty reduction, (World Bank, 2008); yet financial constraints within the agriculture sector remain pervasive and costly, while the little available resources are inequitably distributed, severely limiting smallholder farmers’ abilities to produce and compete in a globalized marketplace.

The Central Bank of Nigeria and other institutions working in the Nigerian agricultural sector identified six critical challenges for 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) an absence of collateral (at least in terms of conventional collateral), e) complex loan assessment processes, and f) high transaction costs for both the lender and borrower.

NIRSAL Plc is a product of a modern strategic thinking regarding agricultural development in Nigeria. Its intervention is meant to provide an inclusive approach to increased 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 (CRG) facility is value chain enabled. The Agricultural value chain (AVC) finance offers opportunities of cost reduction and risk sharing for both the financiers (Counterparties) and farmers (Obligors)

In addition to sharing credit risk with and offering technical assistance to commercial banks, NIRSAL provides for lenders to agriculture while also rating the effectiveness and social impact of such lending. The government also works to provide a favourable fiscal and regulatory environment for the banks and the agricultural value chain actors. For subscribers to NIRSAL’s CRG, a subsidized guarantee fee of only 1 percent flat per annum on outstanding protected principal and interest applies. Furthermore, as a repayment incentive, up to 40 percent of interest cost is rebated provided the loan remains in good standing (no partial or full default).

All crops, livestock and related supportive economic activities across the agricultural value chain are supported by NIRSAL’s CRG facility. Smallholder farmers, a dominant force on Nigeria’s agricultural landscape, as well as other value chain actors are also supported through the Technical Assistance pillar of NIRSAL. With it, borrowers are better able to meet loan obligations while also growing their agribusiness operations. Risk is not only shared through the guarantee mechanism but also through a focus on risk management, including loan appraisal improvements, technological support with a suite of field ICT capabilities and the promotion of value chain linkages and produce offtake arrangements. Over the years, this financing approach has witnessed little or no guarantee delinquency.

According to Aliyu Abdulhameed, NIRSAL Plc’s Managing Director/CEO, since its inception in 2013, “NIRSAL Plc has facilitated CRG backed facilities of over N163billion to various actors in the agricultural value chain for mechanization activities, input distribution, primary production, processing, and marketing of agricultural commodities.” Speaking to this figure, more interventions are ongoing in the Midstream segment of the agricultural value chain where the injection of finance into processing facilities derives from the activities of the pre-Upstream segment. Inputs and other services are consolidated from the pre-Upstream for eventual production at the Upstream segment. The Downstream segment becomes the consolidating linkage markets.

Abdulhameed adds that “with over 748 current and past beneficiaries of the NIRSAL Credit Risk Guarantee (CRG) facility, NIRSAL has innovated many Proof-of-concept projects which demonstrate and domesticate new agribusiness ideas.” These innovations will on-board more smallholder farmers and provide them with affordable financing under portfolio commitments made by various banks on the back of the CRG facility.

In taking its concepts to scale, NIRSAL has continued to use market-driven approaches, adopting integrated value chain-based models, and layering robust de-risking mechanisms to enrich the contents of its CRGs, thereby boosting the confidence of financial institutions in lending to agriculture stakeholders. This has led to the creation of at least 360,000 direct jobs with impact on about 1.8 million lives. Projects so far supported are in primary production, processing, logistics and input supply, with smallholder farmers the majority of beneficiaries. The impact has enhanced their incomes and improved their standards of living.

Confirming the thrust of NIRSAL’s dynamic intervention in the facilitation of finance across the agricultural value chain, Abdulhameed, speaking at the Premium Times National Symposium on Agriculture themed “Fixing the Agriculture Value Chain”, noted that de-risking Nigerian agriculture through innovative financing has accelerated the growth of the sector over the past five years. This has enabled the facilitation of USD66.3 million in financial flows to agriculture from local commercial banks, international finance institutions and development partners because of NIRSAL’s effective and transparent deployment of its USD300 million Risk Sharing facility.

Looking into the future with optimism, and assured of NIRSAL’s solutions, commercial banks have pledged a combined USD500 million to fund agriculture and agribusiness in the short to medium term. The multiplier effect of this will no doubt resonate in greater financial inclusion for smallholder farmers, SMEs, and other players across the agricultural value chain. It will also increase NIRSAL’s collaborations that will lead to the replication of tested and scalable models to increase agricultural productivity, create employment opportunities and wealth for farmers and other value chain actors.

Beyond issuing carefully packaged credit guarantees for agricultural projects, NIRSAL has indirectly inspired a greater flow of finance and investment into the agriculture sector. Many, without necessarily seeking the NIRSAL CRG, have gained fresh impetus to expand their agribusiness operations based on the renewed attention the sector is getting. This has assisted the deliberate shift in the rate of bank lending to agriculture, from 1.4% at NIRSAL’s inception to 4.8% as of Q3, 2020.

NIRSAL has pledged to continue its engagements with the Executives of Deposit Money Banks (DMBs) and other financial Institutions to create more awareness on its activities and the Credit Risk Guarantee facility.

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