NIRSAL Presentation at the NSSP Research Conference (Nov. 14, 2012)Strengthening Agricultural Credit for Value Chain Devel...
Committee. The Bankers Committee aggregates Nigeria’s commercial banks anddiscount houses. The review of 2 decades of agri...
Based on these insights and others, NIRSAL was designed as a CBN sponsoredprivate corporation working in the public intere...
expect to see the volumes rise sharply through March 2013 subject to     market conditions.   The average lending rate is...
 We also anticipate a rapid expansion in our value chain fixing role,      especially as we rollout our technical assista...
aggregate farmers, find them markets, get inputs to them, and provide      agronomic advice during the season. That innova...
occur: how banks, NIRSAL and other investors respond to the demands of theagribusiness market.Thank you.   - End -        ...
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Day 2, Session 1, Part 2: Unlocking Agricultural Growth through Technology and Financial Security

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Day 2, Session 1, Part 2 of the Nigeria Strategy Support Program's 2012 Research Conference

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Day 2, Session 1, Part 2: Unlocking Agricultural Growth through Technology and Financial Security

  1. 1. NIRSAL Presentation at the NSSP Research Conference (Nov. 14, 2012)Strengthening Agricultural Credit for Value Chain Development: Potential andChallengeBy Jude Uzonwanne, Head, NIRSAL PIO, Central Bank of NigeriaAll protocols observedIt is a pleasure to share our thoughts today at the NSSP Research Conference onhow to effectively utilize the financial system to unlock agribusiness’s potential.We shall begin our observations and set the stage by telling you what the statusquo in Nigeria was until about 12 months ago.  First, agricultural was financed primarily from personal savings, capital provided by friends and family, and other non-formal sources. Bank lending to agriculture amounted to about 1% of all formal lending in Nigeria  Second, banks since they did not lend that much did not pay attention to what those loans did or did not do, and assumed they would necessarily go bad. Most banks assumed agric loans had a default rate of 15% - 20%.  Third, lending usually focused on mid tier and large tier food related companies, and rarely to small holder farmers  Fourth, lending was usually backed by landed assets as collateralIt was into this context that NIRSAL emerged. NIRSAL was the output of a reviewconducted by the Central Bank of Nigeria in partnership with the Bankers Page 1 of 7
  2. 2. Committee. The Bankers Committee aggregates Nigeria’s commercial banks anddiscount houses. The review of 2 decades of agric finance interventions andschemes, as well as the state of federal policy, behavior by value chains, andother related elements draw some startling conclusions: 1. Lending cannot succeed unless it occurs in the context of a well functioning value chain. And such effective functioning cannot be assumed; it has to be paid for i.e. a public good investment must be made even if the profits are partially privatized 2. The Central Bank’s approach of direct lending has not yielded the results sought as it distorts bank incentives to take capital risk, as well as exacerbates moral hazard problems. The money at risk does not belong to anyone! 3. Policy failures and inconsistencies are as equally damaging as a consistent but wrongheaded policy 4. Banks have limited institutional memory and capacity regarding lending to agribusiness; loan officers have to be trained and processes instituted 5. Subsidies are not inherently bad; it is the design and delivery of such subsidies that have been poor, in the process corrupting incentives and behavior e.g. fertilizer racket 6. The dismantling of the marketing boards went too far as it deprived the markets of a well organized mechanism for advocating policy change, as well as organizing input supply to farmer groups and marketing farmer output. Page 2 of 7
  3. 3. Based on these insights and others, NIRSAL was designed as a CBN sponsoredprivate corporation working in the public interest. NIRSAL which now hasPresidential permission to form a public limited liability corporation began lifewith the following key attributes:  It would prioritize sales of guarantees over making capital available for onlending; guarantees will be issued to match loan durations  It would provide for insurance to cover some of the risks in farming value chains  It would provide technical assistance that would fix the value chains and make them less default prone  It would rate the performance of banks subject to how well they lend  It would create incentives to reward banks that lend well as well as punish those that fail at it, forcing a broad improvement in bank capacity buildingBased on that design, in Q4 2011, NIRSAL began work and by April 2012, haddeveloped a new set of rules for agribusiness lending. Based on those rules,aggressive marketing and capacity building discussions with farmer groups, stategovernments, value chains, banks and MFIs, progress is now emerging. Forexample, banks once their own internal governance and evaluation mechanismswere in place, started accepting NIRSAL type loan applications from their clients.Where are we today?  Today, we have issued guaranteed on over N6 billion in loans. We have a pipeline of about N20 – N25 billion through end of January 2013. We Page 3 of 7
  4. 4. expect to see the volumes rise sharply through March 2013 subject to market conditions.  The average lending rate is 18%; NIRSAL also issues an interest rate subsidy averaging 30%, bringing our average lending rate down to 12%  The average duration of loans is 285 days; our guarantees match that period; we are currently in final discussion stages for a 7 year guarantee, so it is important to understand that NIRSAL matches what the market wants, and the markets are becoming more risk seeking each passing quarter  Loans have been issued for activities such as purchase of sorghum, production of cassava chips for export, purchase of equipment for oil palm companies, purchase of feedstock for oil mill (soya beans and fresh palm fruit bunch), and cassava grits plantsGoing forward, what do we see as the opportunity?  First, we see a market for working capital and loans to agribusiness that is a minimum of N600 billion per annum; we expect to be able to guarantee a significant portion of that. The proposition is that 1 Naira from NIRSAL is to leverage 10 Naira from commercial banks. It is foreseen that out of the 600 billion Naira needed every planting season, NIRSAL, at its full capacity, would be able to provide 450 billion Naira.  We see opportunity in expanding the international sources of capital available to the Nigerian farmer and agribusiness. We intend to enter into the market and issue long term debt instruments that can be used to invest directly by NIRSAL or provide low cost liquidity to certain class of lenders, as well as strengthen NIRSAL’s own balance sheet Page 4 of 7
  5. 5.  We also anticipate a rapid expansion in our value chain fixing role, especially as we rollout our technical assistance offering. That offering will ensure that more value chains and its participants are ready to use credit responsibly.What challenges do we foresee? A few have emerged in the past year but arereally variations of tradition challenges. For example: 1. Identity issues; many banks still complain that the majority of farmers do not have proper identification, hence they are not able to lend to them; we are discussing a number of biometric based interventions to tackle that 2. Cost of capital remains high due to the Central Bank of Nigeria’s high lending rate (12%), which in itself reflects inflation expectations for the economy 3. Continued policy and financial mixed signals create confusion in the market e.g. the periodic offer of free seeds 4. The speed at which commercial banks are gearing up to lend to agriculture; they have made strong progress but we wish they could move faster 5. A culture in the financial and policy circles that does not seem to understand the need for urgency and creativity in problem solving; often idea that the way things have always been done is a detriment to progress does not seem to sink in 6. Insufficient levels of innovation in financial services and other supporting services for agribusiness e.g. solutions for credit rather than products, and emergence of companies such as Oxfam and Technoserve that can Page 5 of 7
  6. 6. aggregate farmers, find them markets, get inputs to them, and provide agronomic advice during the season. That innovation in service design and delivery remains sharply missing. Truly, the challenge is not always access to credit; ideas and field systems for translating those ideas into profits is perhaps more critical to successLooking forward, we are cautiously optimistic that despite the challenges we see,progress will continue to be made. The levels of lending are rising as banks andother financial institutions improve their own institutional capacity to lend andlearn. In addition, we continue to see policy support despite occasional regressivebehavior. What will matter going forward is the level of innovation in action, andbehavior.Today, what the market may need is not more guarantees but smarter and morenuanced ways to deliver credit and move output. Credit delivery, whether in kindor in cash, needs to reach the customer on a timely basis. And in a world with lesspredictable rains, that certainty becomes more important to outcomes.Therefore the future of Nigerian agribusiness will become about what innovationsare we able to develop and deliver to the market that simplifies the essentialchallenge of this business. Given that innovation does not recognize borders, it isvital that we NIRSAL also acknowledge that such innovation will push us toperiodically reinvent our business model as well. Change cannot be uni-directional. As the banks and markets evolve, we expect that we must evolve inorder to remain commercially relevant. That is where the real transformation will Page 6 of 7
  7. 7. occur: how banks, NIRSAL and other investors respond to the demands of theagribusiness market.Thank you. - End - Page 7 of 7

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