Credit Guarantee Schemes: Experiences and lessons from Nigeria


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Credit Guarantee Schemes: Experiences and lessons from Nigeria

  1. 1. By Uzoma F. Onuoha Head, Agric. Credit Support Division DEVELOPMENT FINANCE DEPARTMENT CENTRAL BANK OF NIGERIA ABUJA A Paper Delivered at the African Rural and Agricultural Credit Association (AFRACA) International Conference on Revolutionizing Finance for Agriculture, Nairobi, Kenya (July 14th -18th , 2014) Credit Guarantee Schemes: Experiences and Lessons from Nigeria
  2. 2. | OULTLINE 1 • Introduction • Financial Risks in Agricultural Lending • Consequences of Bank’s perceived Risk in Agriculture • What are Credit Guarantee Schemes • Categories of CGSs • Credit Guarantee Schemes of the Central Bank of Nigeria o Agricultural Credit Guarantee Scheme Fund (ACGSF) o Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) o The Small and Medium Enterprises Credit Guarantee Scheme (SMECGS) • Other Institutions involved in Credit Guarantee in Nigeria • Challenges of CGSs in Nigeria • Way Forward
  3. 3. | 1 2 INTRODUCTION: NIGERIA AT A GLANCE Sources: Central Bank of Nigeria National Bereau of Statistics EfinA Population 168.3 million GDP Growth Rate 7.41% Inflation Rate 8% Nominal GDP $509,970.14 GDP Per Capita $2,921.45 Financial Exclusion rate 39.7% Life Expectancy at birth 47.6 years Incidence of Poverty 72.6% Unemployment Rate 25.7% Agriculture 21.40% Industry 26.37% Services 52.23% SECTORAL CONTRIBUTIONS TO GDP
  4. 4. | 3 Agriculture represents an important part of Nigeria’s economy, accounting for 60% of employment and 21.4% of GDP … SOURCE: FAO Stat; CBN; Press research; team analysis 42 58 99 Agriculture Other Exports2 1 GDP 21.4. Employment 60 1 Working population 2 Trillion 3 Productivity measured as output per worker. Productivity in Nigeria in 2007 was US$1,500 for agriculture, compared to US$2,600 for other sectors. AGRICULTURE IN NIGERIA Share of agriculture in production, employment and exports, 2013 Percent 100% = 98 m1 N 24.3 tr2 N 3.2 tr2 5 95 40 78.6 Nigeria has the capacity to unleash its agricultural potential not only in the context of meeting domestic staple food needs but in unleashing its food export potential. This potential however, cannot be achieved if the primary bottleneck of restricted access to finance is not addressed with urgency.
  5. 5. | 1 4 BANK CREDIT TO AGRIC SECTOR IN YEAR 2012 Even though the agricultural sector contributes significant proportion of the GDP, bank credit to the sector was only 3.9 per cent at end-2012. Less Preferred Sectors; 38,2 Others; 22,3 Agriculture; 3,9 Solid Minerals; 21,7 Exports; 0,8 Manufacturing; 13,1 Priority Sectors, 39.5 BANK CREDIT TO AGRICULTURE IN NIGERIA
  6. 6. | 5 FINANCIAL RISK IN AGRICULTURAL LENDING Financial risk is a broad term that refers to the types of risks associated with financing and financial transactions e.g. loans have the risk of default. This is one of the major reasons why banks do not lend to Agriculture in Nigeria. Some Forms of Financial Risks Credit risk (also called default risk), is the risk associated with a borrower going into default (not making payments as promised). Asset-backed risk : Risk that the changes in one or more assets that support an asset-backed security will significantly impact the value of the supported security. Liquidity risk: This is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit). Market risk e.g Equity risk, Interest rate risk, currency risk, commodity risk. A survey by the World Bank revealed that about 52 percent of firm managers in Nigeria indicated that access to finance was a serious constraint and 46 percent of the same group indicated that cost of financing was the next constraint.
  7. 7. | RISK FACTORS AFFECTING BANKS’ FINANCING OF AGRICULTURE • PERCEPTION -High perceived risk -Lack of understanding of the agric. sector -High default rates from government- driven lending programs. -Do not perceive agriculture as a business -Are unable to access and price the risk elements and so want the sector de-risked to make it more attractive for financing • COVARIANT RISKS -Incremental weather, pests and diseases, price volatility, farming systems and the differentiation of farmers • OTHER CHALLENGES -Agriculture suffers information asymmetry; -Lacks the required technology and infrastructure. 6
  8. 8. | 7 CONSEQUENCES OF BANK’S PERCIEVED RISK IN AGRICULTURE i. Missed opportunities – Many promising projects fail to see the light of the day because of banks failure to lend. i. Significant cost overruns – Excess cost above original estimates as a result of expenses due to risk assessments. ii. Scheduled delays – Risk assessment increases the cycle time for processing agric. Loans. iv. Cancellations/licence withdrawals – under regulated banking regimes non- compliant banks may suffer indictments
  9. 9. | 8 CONSEQUENCES OF BANK’S PERCIEVED RISK IN AGRICULTURE CONT’D v. Fines and penalties – As a result of sharp practices erring banks face fines and penalties. vi. Loss of credibility – As a result of iv. And v. credibility issues arise for indicted lending institutions. vii. Loss of output/market share – farmers produce below optimum while banks suffer reduced market share that would have accrued from agric. Financing. viii. Reduction or total loss of income – When there is reduced or no production there will be reduced or lost income from agriculture.
  10. 10. | 9 Credit guarantee is a form of insurance that helps to protect the interests of a seller from the chance of non- payment by a buyer. CGSs therefore provide guarantees to groups that do not have access to credit by covering a share of the default risk of the loan. In case of default, the lender recovers the value of the guarantee. Credit guarantee schemes provide guarantees to individuals or groups that do not have access to credit by covering a share of the default risk of the loan. In case of default, the lender recovers the value of the guarantee. CGSs are thus designed to diminish the risk associated with lending to SMEs as they can reduce information asymmetry and alleviate high collateral requirements. WHAT ARE CREDIT GUARANTEE SCHEMES (CGSs)
  11. 11. | 10 BENEFITS OF CREDIT GUARANTEE SCHEMES i. Reduction of the overall risk in an economy ii. Mitigating against inefficient distribution of wealth iii. The interest of banks to finance SMEs can be increased by the use of guarantee mechanisms. iv. Financial sustainability - It is possible for credit guarantee schemes to stand on their own, without outside assistance. v. Credit additionality i.e. the extra loans that would not have come about without the credit guarantee scheme vi. Economic additionality and spillover effects i.e. the opportunity to contribute not only to credit additionality, but also to technology and knowledge spillover and economic additionality, e.g. increases in profit and/or employment.
  12. 12. | 11 CREDIT GUARANTEE SCHEMES IN OTHER CLIMES (STYLIZED FACTS) a. Canadian Small Business Financing Program (CSBF) • Type of Guarantee – MSMEs (Private) • Guarantee Coverage – 85% • Maximum Limit - $500,000.00 • Guarantee fee – 2% of loan b. The Small Business Development Fund (SBDF) of Slovenia • Type of Guarantee – MSMEs (Public) • Guarantee Coverage – 60 to 80% • Maximum Limit - $60,000.00 a. Portugal Mutual Counter-Guarantee Fund • Type of Guarantee – MSMEs (Private) • Guarantee Coverage – 80% • Guarantee fee – 2% of loan up to €150,000 and 1.5% for larger transactions. a. Chilean Guarantee Fund for Small Businesses • Type of Guarantee – MSMEs (Public) • Guarantee Coverage – 80% for loans below $90,000.00 and 50% for loans above $90,000.00 • Guarantee fee – 2% of loan depending on borrowers default history.
  13. 13. | 12 BASIS FOR CENTRAL BANK OF NIGERIA’S AGRICULTURE FINANCING INTERVENTION PROGRAMMES AND SCHEMES These endeavors are expected to facilitate the emergence of a strong and self-sustaining agricultural economy in which private sector would ultimately be the leading engine of growth. In view of the risks associated with the agricultural sector and banks reluctance to finance the sector, the Central Bank of Nigeria has been involved in the design and implementation of guarantee schemes and programmes aimed at addressing the problem of limited access to credit by large, medium and small-scale producers..
  14. 14. | CREDIT GUARANTEE SCHEMES OF THE CENTRAL BANK OF NIGERIA (CBN) 13 1 Central Bank of Nigeria Credit Guarantee Schemes Nigerian Incentive Based Risk Sharing System for Agricultural Lending NIRSAL (2010) N200 billion Small and Medium Enterprises Credit Guarantee Scheme (2010) Interest Drawback Programme - IDP Agricultural Credit Guarantee Scheme Fund ACGSF (1978) Trust Fund Model - TFM SME Finance Agric. Finance The Central Bank of Nigeria operates a direct retail credit guarantee scheme system geared towards agriculture and MSMEs Self-Help Groups Linkage - SHG
  15. 15. Agricultural Credit Guarantee Scheme (ACGS) Objectives  Provides guarantee of 75% for loans granted for agricultural purposes  Encourages commercial banks to increase lending to the sector  Stimulates increase in productivity across the agriculture value chain Funding StructureEstablishment The Agricultural Credit Guarantee Scheme Fund (ACGSF) was established by Decree No. 20 of 1977, and became operational in April 1978. CBN 40% FGN 60% CBN – Central Bank of Nigeria FGN – Federal Government of Nigeria Why the ACGSF ? 14
  16. 16. Agricultural Credit Guarantee Scheme (ACGS) Cont’d Activities  ACGS Fund provides credit guarantee on facilities extended to famers by banks up to 75 per cent of the amount in default net of any security realized.  Activities covered under the Scheme are crop and livestock production, processing and marketing.  Others are establishment or management of plantation for the production of rubber, oil palm, cocoa, coffee, tea and similar crops.  N71.471billion disbursed to 859,541 farm enterprises Modalities Managing Agent The Fund is managed by the Central Bank of Nigeria which is responsible for its day-to-day operations. Max Loan Limit = N10m adjusted in June 2014 to N50m The ACGS Framework 15
  17. 17. Innovations under the ACGS Self Help Linkage Banking Programme The Self-Help Group Banking Linkage Programme (SHGBLP) was launched in 1991 and became operational in 1992. Establishment Objectives The aim of the Self-Help Group Linkage Banking is to:  Provide alternative form of guarantee to commercial banks through use of resources pooled together by farmer groups  Inculcate banking habits in farmers  Mobilize farmers to build up resources for financing their farm projects without recourse to bank borrowing on the long run. 16
  18. 18. Innovations under the ACGS Cont’d Trust Fund Model (TFM) Cont’d  The Trust Fund Model (TFM) was introduced in 2001  Reduction of the risk exposure of banks in agricultural lending to uncollateralized farmers under the ACGS.  Reinforce the confidence of banks in granting credit facilities to farmers  Under TFM, oil companies, State/Local Governments and Non Governmental Organizations (NGOs) place funds in trust with lending banks to augment the small group- savings of the farmers as security for agricultural loans  The Trust Fund secures 25% or more of the intended loans of the prospective borrowers;  The farmers’ savings secure another 25% of the loan while;  the ACGSF guarantees 75% of the remaining 50%, thereby leaving the lending bank with a risk exposure of only 12.5%.  51 MOUs signed valued N5.516 billion 25% Cash Deposit by Farmers as Security 25% Cash Deposit from Counter parties as Security 75% Guarantee from ACGS Credit Risk is reduced to 12.5% for Lending banks 17
  19. 19. Innovations under the ACGS Cont’d Interest Drawback Programme (IDP)  Introduced in 2003 for loans under the and has a capital base of N2.0 billion subscribed to by the Federal Government (60%) and Central Bank of Nigeria (40%).  The IDP is managed by the CBN and under the ACGS Board Establishment Objectives  Provide interest rebate to farmers that fully paid their loans on schedule.  Reduce the cost of borrowing and burden of high interest rates to farmers.  To encourage timely repayment and reduce the contingent liability on the ACGS Fund CBN 40% FGN 60% Funding Structure CBN – Central Bank of Nigeria FGN – Federal Government of Nigeria 18
  20. 20. Innovations under the ACGS Cont’d Interest Drawback Programme (IDP)  Under the IDP, farmers borrow from lending banks at market-determined rates  Provide interest rebate of 40% to farmers that fully repaid loans on schedule to reduce the cost of borrowing. Modalities 19 Interest rebate of 40%, valued N2.05 billion ($13.163million) paid to 240,665 claims as at end- April 2014.
  21. 21. Loans Guaranteed Under the ACGS 20 881,892 881,892 856,731 208,495 As at end-April 2014 Granted N74.93 billion ($481.153 million) to 881,892 beneficiaries since inception.
  22. 22. Repayments and Settled Claims under the ACGSF N74.93 Billion N51.45 Billion 0 10 20 30 40 50 60 70 Releases Repayments Releases , 881,892 Beneficiaries Repayments, 664,559 Beneficiaries Repayments and Claims settlement Cumulatively, repayment under ACGS stood at 664,559 valued N51.45 billion ($330.37 million) from inception to end April 2014. The Scheme has recorded a repayment rate of 68.66%*. On the other hand, the cumulative number of settled claims from inception to date is 14,682 claims valued N546.94 million ($3.512 million). Note: $1 = N155.73 The ACGSF has recorded a repayment rate of 68.66%. The rather low repayment rate (68.66%) is because many loans are still ongoing and yet to be liquidated
  23. 23. ACGS SUSTAINABILITY FRAMEWORK To ensure the sustainability of the ACGS Fund and further strengthen its ability to meet its contingent liability  The ACGS Fund is invested in Nigerian Treasury Bills  The IDP also reduces the quantum of claims payments by encouraging farmers to repay on time through rebates. N100.0m 1978 N6.167b 2014 N3.0b 2001 22
  24. 24. 23 ACGS Impact Scenarios
  25. 25. ACGS Impact Scenario, Cont’d Loan Size & Limit The demand for loan size of <N5,000 has continually decreased from 20,848 loans in the year 1990 to only 27 loans in 2013 while the demand for loan size >N100,000 increased from just 15 loans in the year 1990 to 20,315 loans in the year 2013. Loans below N100,000 make up 63.90% of the total guarantees demanded 24
  26. 26. | 25 SWOT ANALYSIS OF THE ACGSF Strengths • ACGSF has a good risk formula (75%/25%). • The Fund has never refused to pay a claim. • The DMBs have a representative on ACGSF’s Board which deepens confidence. • Initiatives such as the IDP have decreased the rate of default by borrowers. Weaknesses • The delays in settling claims. • Inadequate scrutiny of loan applications by banks led to massive default rates • Lack of MIS given the large volumes of loans. Opportunities • In Nigeria, there is a large market for credit among small- scale farmers. • Favorable policies in place towards financial inclusion and real sector financing. Threats • The non-autonomous nature of the ACGSF board, which is subject to the influence of the national government. • Two banks (Union Bank of Nigeria and First Bank of Nigeria) are the major players in the Scheme. If one of these banks opts out, consequences would be dire for agricultural productivity and food security.
  27. 27. | NIGERIA INCENTIVE-BASED RISK SHARING SYSTEM FOR AGRICULTURAL LENDING (NIRSAL): A VALUE CHAINS APPROACH TO CREDIT GUARANTEE UNDER THE NIRSAL is an initiative aimed at; •Providing farmers with affordable financial products •Reducing the risk to loans The Central Bank of Nigeria (CBN) on August 9, 2010 signed an Agreement with the Alliance for a Green Revolution in Africa (AGRA) to develop this new mechanism for unlocking the access of farmers, agro-processors, agribusinesses and input suppliers to financing in the agricultural value chain. OBJECTIVES OF NIRSAL •Spark agricultural industrialization process through increased production and processing across the value chain. •Build capacities of Nigerian banks to lend to agriculture, •Deploy risk sharing instruments that will lower the risks of lending, •Provide technical assistance for farmers and banks •Develop a bank rating scheme that will incentivize and showcase/situate banks based on their capacities to lend to the agricultural sector. 26 1
  28. 28. | NIRSAL is pivoted on five pillars to be addressed by an estimated USD 500 million of CBN money that will be invested to address the various aspects of the pillar as follows: •Risk-sharing Facility (USD 300 million). •Insurance Facility (USD 30 million). •Technical Assistance Facility (USD 60 million •Holistic Bank Rating Mechanism (USD 10 million). •Bank Incentives Mechanism (USD 100 million). 27 NIRSAL CONT’D
  29. 29. NIRSAL Mechanics • A guarantee fee of 1% per annum on outstanding balance of amount guaranteed. • Loans benefiting from existing CBN schemes/interventions e. g. ACGSF, ACSS AND CACS are not eligible for interest drawback. • NIRSAL shares risk with Banks and other Counterparties on predetermined rates of the face value on loans: primary production & mechanization - 75%, large scale & processing – (50%), logistics (20%). • Each risk guaranteed loan is qualified in principle for consideration for interest drawback paid on quarterly basis. Small holder farmers and cooperatives (40%), Large scale farmers and Agro input dealers (20%).
  30. 30. RiskSharingoccursintheformofsellingaCreditRiskGuarantee... Potential lenders include traditional banks, microfinance institutions, trade finance providers, asset managers, and private equity funds Credit instrument could be a loan portfolio, a loan, a bond or in some cases, a specific commitment letter Identified Lender / Issuer /Counterparty NIRSAL Credit Risk Guarantee Identified Borrower Potential borrowers include farmer groups (cooperatives), large corporate farmers, processing companies, agric service providers, logistics companies, wholesale distributors etc Whole agribusiness value chain covered across all crops and livestock activities Loan principal Loan principal and Interest payments Interest Rebates Small scale - 40% Large Scale - 20% Agro dealer - 20% Guarantee Fee (1%) Credit Risk Guarantee (Face Value) Production - 75% Processing - 50% Logistics - 20% NIRSAL Mechanics, Cont’d
  31. 31. | NIRSAL AS AN AUTONOMOUS ENTITY • Approval has been granted for NIRSAL to operate as an independent entity. 30 Achievements of NIRSAL From Inception to April 2014 • Forty (45) CRGs Covers valued N16.272 billion ($104.48 million) were issued to beneficiaries. • Seventy three (73) IDPs valued N139.990 million ($898,927.63), as at April 2014. Note: $1 = N155.73
  32. 32. The Small and Medium Enterprises Credit Guarantee Scheme (SMECGS) Stimulate and sustain private sector investment in the power and airline sectors as well as fast track the development of both sectors of the economy To fast-track the development of the manufacturing SME sector of the Nigerian economy by providing guarantee for credit from banks to SMEs and manufacturers Purpose Provide guarantee cover of 80% of principal and interest on term Loans to SMEs for refurbishment/equipment/upgrade/expansion, overdrafts, etc. Modality The raised N200 billion ($1,284 billion) as contingent liability to provide 80% guarantee cover to banks for SME loans Funding Note: $1 = N155.73
  33. 33. The Small and Medium Enterprises Credit Guarantee Scheme (SMECGS), Cont’d 20% 72 SME Projects CBN Assumes 80% risk on SME loans by providing Guarantees to Banks Via a contingent liability fund of N200 billion80% BankLoansto SME Banks take only 20% risk on SME loans N3.216 billion ($20.65 million) Performance As of April 2014 REPAYMENT The sum of N1.558 billion ($10.004 million) has been repaid by 23 SME projects. Note: $1 = N155.73
  34. 34. The Nigerian Export-Import Bank (NEXIM) 33 OTHER INSTITUTIONS INVLOVED IN CREDIT GUARANTEE IN NIGERIA Note: $1 = N155.73 Types of Guarantees Issued by NEXIM PRE-SHIPMENT GUARANTEE: This is a guarantee of credits/advances granted by NEXIM for the purpose of manufacturing, purchasing, processing and/or packaging of goods to be exported under a confirmed export order. It covers 75% of loans and advances. POST-SHIPMENT GUARANTEE: This is a guarantee of credits/advances granted by a bank in Nigeria against an export bill or any other receivables. It covers 85% of loans and advances. ADVANCE PAYMENT GUARANTEE: This is designed to protect foreign buyers against payment risks in respect of money advanced to exporters in Nigeria to finance an export order. It covers 100% of loans and advances. This is an independent DFI Established in 1991 as an Export Credit Agency (ECA). NEXIM has since its inception disbursed over N13.651 billion ($87.65 million) as loans and advances.
  35. 35. | 1 34 BANK CREDIT TO AGRIC SECTOR 2009 - 2012 1,4 1,4 1,7 3,5 3,9 0 0,5 1 1,5 2 2,5 3 3,5 4 4,5 2008 2009 2010 2011 2012 Following CBNs interventions in recent years, commercial bank’s credit to agriculture has increased from 1.4% in 2008 to 3.9% in 2012
  36. 36. | 35 CHALLENGES OF CREDIT GUARANTEE SCHEMES, CONT’D Demand Side Challenges • Limited managerial capability due to inexperience, illiteracy and absence of mentoring and entrepreneurial network. • Lack of collateral for small rural borrowers • Lack of good business plan to convince banks to lend. • Inability to afford insurance coverage by poor rural people. • Repayment problems due to erroneous belief that CGS is a national cake. Supply Side/ Instituional Challenges • High collateral requirement, interest rate and stringent eligibility criteria for benefiting under CGS at bank level. • Banks’ risk averse behavior • High interest rate charged by financial institutions. • Financial institutions’ lack of capacity to develop suitable CGS products to meet the needs of clients.
  37. 37. | 36 CHALLENGES OF CREDIT GUARANTEE SCHEMES, CONT’D Policy/Institutional Challenges • Paucity of rigorous data on the demand for financial services especially in rural areas due to information asymmetry. • Political instability and social insecurity have hindered penetration of CGS particularly agriculture. • Agricultural Finance not viewed as a strategic business but development programme by policy makers. GOVERNMENTPOLICIES
  38. 38. | 37 WAY FORWARD FOR CREDIT GUARANTEE SCHEMES IN NIGERIA • The micro finance sector should be a priority sector for deepening guarantee schemes especially in rural areas. • Government should inject more money to beef up the ACGSF capital base and also utilize specialized banks in credit guarantee purveyance. • Deployment of a fixed/movable collateral for beneficiaries who have access to the formal lending institutions (CBN in collaboration with African Finance Corporation has commenced efforts towards establishment of a movable collaretary registry in Nigeria.. • Agriculture must be viewed as a strategic business by policy makers, financial Institutions and practitioners. • Central banks should ensure consistency, transparency and clarity of respective legal and regulatory framework over all guarantee schemes. • Provision of technical assistance to banks and entrepreneurs.
  39. 39. | 38 • Involving donors, the public sector and the private sector to serve as sponsors under Trust Fund Models of guarantee schemes. • There is need for appropriate designs of CGS in order to ensure financial sustainability, taking into account on the one hand the need to limit default rates and cover the operating costs. • CGSs to be used as effective instruments to reduce the information gap that exists between lenders and borrowers, especially in the case of agriculture. • There is need for more in-depth evaluation, particularly on CGSs financial sustainability and on their financial and economic additionality. • Deployment of a rating system for financial institutions participating in CGS with the objective of rewarding and motivating them appropriately. WAY FORWARD FOR CREDIT GUARANTEE SCHEMES IN NIGERIA, CONT’D
  40. 40. | The CBN has been involved in the design and implementation of various Credit Guarantee schemes and programmes with the aim of addressing the challenge of low access to credit by large, medium and small-scale producers. This is due to the risks associated with the agricultural sector and banks reluctance to the sector. These initiatives include ACGSF, SMECGS and NIRSAL. They are endeavors geared towards enabling the emergence of a strong and self-sustaining agricultural economy in which private sector would power the engine of growth. It is evident that a lot has been achieved, but more can still be done and CBN is poised towards that. The launching of the Financial Inclusion Strategy in 2012 and the MSMEDF in 2013 are additional efforts towards facilitating credit flow to agriculture and the real sector in general. In the coming years, the Bank will continue to maintain its poise low/affordable interest rates for agricultural loans as well as pursuing effective functioning of various other initiatives to ensure effectiveness, efficiency, synergy and complementarities in areas that are within its mandate. CONCLUSION 39
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