Despite
the plethora of financing schemes, the issue of adequate, affordable and timely
access to credit by Nigerian farmers remains a major challenge. For example,
between 2006 and 2009, the agricultural sector attracted on average 2.1 per
cent of the total credit to the economy in contrast to its average contribution
of 42.2 per cent to the GDP over the same period. The low credit to the
sector by the banking industry could be attributed to a number of reasons, notable
among which are the high risk inherent in the sector and the perception of the
sector as non-strategic to their business models. Hence,
as long as these concerns
linger, the issue of financing agriculture in Nigeria would require more than
just providing funds to the sector. It is against this background that a new financing
framework, the Nigerian Incentive-based Risk Sharing System for Agricultural
Lending (NIRSAL) is being introduced.
This
model of financing agriculture is different in many ways from the current financing
models which have not yielded the desired impact of making adequate credit
available to the sector. NIRSAL is a demand-driven credit facility rather than
the current supply-driven funding. It would adopt a value-chain approach to
lending as banks would be free to choose which part of the value chain they
would be interested in lending to. It would build the capacity of the banks to
engage and deliver loan; reduce counterpart risks facing banks through innovative
crop insurance products; reward performance in agricultural lending; and would
be managed with performance-based incentives. NIRSAL would be tailored along
the already developed model of the Impact Investing
Fund for African Agriculture (IIFAA) based on Nigerian‘s financial and agricultural
development requirements. It would pool together the current resources in CBN‘s
agricultural financing schemes and other investors‘ funds and transfer these
into the five components of the programme but managed outside of the CBN. In
other works, existing agricultural support frameworks like CACS, ACGS, ACSS and
NAIC, etc, would be assessed, modified and integrated into five components.
The
scheme aims at reversing the trend of low credit to the agricultural sector by encouraging
more banks to lend to the sector through an incentive based system. The
programme would ensure that hitherto unproductive public capital will translate
to more productive output by using it to create incentives for banks to be more
involved in agricultural lending, increase market absorptive capacity, reduce
lending risk as well as help banks to understand the sector better.
Furthermore,
it would help banks build capacity to develop sustainable term financing and
affordable loan products to promote commercially oriented agriculture for small
holder farmers and businesses. It will also develop efficient financial
delivery system that would serve the need of medium and large scale farmers.
The programme set out to stimulate a new form of strategic partnership and
alliance between banks to increase lending, reduce the transaction cost and
establish a sustainable financial delivery platform into rural areas.
Specifically,
the objectives of the programme include:
Stimulate innovations in agricultural lending
Encourage banks that are lending to the sector
Eliminate state dependency by banks for deploying loan-able funds to agriculture
Leverage DMBs balance sheet for lending into Agriculture; and
Ensure risk-sharing approach that will build a business approach where banks
share in the risk of lending to the sector
In
achieving these objectives, there would be five integrating components to ensure
increased bank credit to the agricultural sector, ensure systemic change and
reward performance based on evidence using market-driven incentives. These five
pillars would work together in an integrative way to change the way banks lend
to agricultural sector. The five major components of this programme are: Risk
Sharing Facility (RSF), Insurance Components (IC), Technical Assistance Facility
(TAF), Bank Incentive Mechanism (BIM) and Agricultural Bank Rating System
(ABRS).