Page 1 of 7

NIRSAL Presentation at the NSSP Research Conference (Nov. 14, 2012)

Strengthening Agricultural Credit for Value Chain Development: Potential and

Challenge

By Jude Uzonwanne, Head, NIRSAL PIO, Central Bank of Nigeria

All protocols observed

It is a pleasure to share our thoughts today at the NSSP Research Conference on

how 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 status

quo 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 collateral

It was into this context that NIRSAL emerged. NIRSAL was the output of a review

conducted by the Central Bank of Nigeria in partnership with the Bankers

Page 2 of 7

Committee. The Bankers Committee aggregates Nigeria’s commercial banks and

discount houses. The review of 2 decades of agric finance interventions and

schemes, as well as the state of federal policy, behavior by value chains, and

other 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 3 of 7

Based on these insights and others, NIRSAL was designed as a CBN sponsored

private corporation working in the public interest. NIRSAL which now has

Presidential permission to form a public limited liability corporation began life

with 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 building

Based on that design, in Q4 2011, NIRSAL began work and by April 2012, had

developed a new set of rules for agribusiness lending. Based on those rules,

aggressive marketing and capacity building discussions with farmer groups, state

governments, value chains, banks and MFIs, progress is now emerging. For

example, banks once their own internal governance and evaluation mechanisms

were 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 4 of 7

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 plants

Going 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 5 of 7

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 are

really 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 6 of 7

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 success

Looking 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 and

other financial institutions improve their own institutional capacity to lend and

learn. In addition, we continue to see policy support despite occasional regressive

behavior. What will matter going forward is the level of innovation in action, and

behavior.

Today, what the market may need is not more guarantees but smarter and more

nuanced ways to deliver credit and move output. Credit delivery, whether in kind

or in cash, needs to reach the customer on a timely basis. And in a world with less

predictable rains, that certainty becomes more important to outcomes.

Therefore the future of Nigerian agribusiness will become about what innovations

are we able to develop and deliver to the market that simplifies the essential

challenge of this business. Given that innovation does not recognize borders, it is

vital that we NIRSAL also acknowledge that such innovation will push us to

periodically reinvent our business model as well. Change cannot be uni-

directional. As the banks and markets evolve, we expect that we must evolve in

order to remain commercially relevant. That is where the real transformation will

Page 7 of 7

occur: how banks, NIRSAL and other investors respond to the demands of the

agribusiness market.

Thank you.

- End -