By

Paul N. Eluhaiwe

Director, Development Finance Department

CENTRAL BANK OF NIGERIA ABUJA

Panel notes for the Agriculture Stakeholders Session at the Nigeria Development Finance Forum 2014 Conference New York U.S.A. (May 29th -31st , 2014)  

By

Paul N. Eluhaiwe

Director, Development Finance Department

CENTRAL BANK OF NIGERIA ABUJA

Panel notes for the Agriculture Stakeholders Session at the Nigeria Development Finance Forum 2014 Conference New York U.S.A. (May 29th -31st , 2014)  

Agriculture and Finance in Nigeria: Experiences and

Lessons

Agriculture and Finance in Nigeria: Experiences and

Lessons

|1 2

INTRODUCTION: AFRICA AT A GLANCEINTRODUCTION: AFRICA AT A GLANCE

Sources:

African Development Bank 2012Africa commission 2011

•Population: 1.033 billion•GDP growth rate: above 5% in 2012•It is the world’s second fastest growing region after Asia .•Agricultural sector employs over 60% of the population•High rate of unemployed youth population (3 in 5) • High cost of finance hampers the continent’s competiveness in the global economy.• Has the largest share of arable land in the world (16%) and the largest share of uncultivated arable land (79%).

|1 3

The African Development Bank (2013) reported that although agricultural performance has improved since 2000, but growth is not yet fast enough.

•69 % of all Sub-Saharan Africans (SSA) work force engage in agriculture.

•In the EU, currently, only 5.1 per cent of the population make their living from agriculture – the majority of people work in sectors of industry or services. - World Bank.

• 63% SSA live in rural areas, whereas 74% of EU-citizens live in urban areas.

•SSA agricultural productivity (yield per hectare) is about 50 per cent of its European equivalent.

•Women account for over 50% of the agricultural labour force and grow 80-90% of the food.

•They own less than 2% of all land and receive less than 10% of all credit.

INTRODUCTION: FACTS AND FIGURES ON AFRICAN AGRICULTURE INTRODUCTION: FACTS AND FIGURES ON AFRICAN AGRICULTURE

|1 4

• Currently, it is estimated that 3.5 million tractors would be needed to bring Africa up to the level of other regions.

•  Post-harvest grain losses in sub-Saharan Africa could total $4 billion per year.

• Almost 90 percent on less than US $2/day

(IFAD, 2011).

• 60 percent of the rural population live on less than US $1.25 a day.

• Average tractors per 100km2 of arable land

• World: 200• South Asia: 129• Africa: 13

• Approximately 626,000 tractors in Africa, for over 200 million people economically active in agriculture,

•  

INTRODUCTION: FACTS AND FIGURES ON AFRICAN AGRICULTURE INTRODUCTION: FACTS AND FIGURES ON AFRICAN AGRICULTURE

|1 5

• over ⅔ of African countries are net importers of agricultural products.

• On average, the annual food

trade bill of the continent was $17.3 billion of exports and $24 billion of imports, leading to an average annual deficit of $6.6 billion.

• It is estimated that Africa imports about 28% of its calorie requirements. The major imports are wheat (58%), rice (41%) and oils (54%).

AFRICA’s FOOD IMPORT BILLAFRICA’s FOOD IMPORT BILL

|1 6

• CAADP was developed by the African Union to foster agriculture-led development.

• By 2011, (3 years after 2008 deadline to attain the Maputo Declaration of 2003) only nine African countries reached the target 10% of budgetary allocation to agriculture.: Burkina Faso, Ethiopia, Ghana, Guinea, Malawi, Mali, Niger, Rwanda, Senegal.

• Grow Africa Initiative (GAI) was launched by the AU Commission, the NEPAD Agency and the WEF in 2011 to coordinate accelerated private sector investment for sustainable growth in African agriculture.

  

THE COMPREHENSIVE AFRICA AGRICULTURE DEVELOPMENT PROGRAM (CAADP) & THE GROW AFRICA INITIATIVE

• During the 2014 World Economic Forum on Africa in Abuja, Nigeria, African leaders reaffirmed their commitment to achieving GAI objectives.

• Partners of the GAI have pledged to increase their investment in agriculture from $3.5 billion in 2011 to $7.2 billion in 2014.

• The aim is to double the incomes of at least 25,000 African smallholder families .

•  •  

| 7

MULTILATERAL AGENCIES’ ACTIVITIES IN SUB-SAHARAN AFRICA

Over a period of 35yrs (1974 – 2008), the African Development Fund approved 1,407 loans, and 768 grants, totaling $19.14 billion.

Agriculture and rural development accounted for 23.3%: infrastructure took the bulk of the resources at 35.7%, while the multi-sector and social sector received 19.0% and 18.5% respectively. 

In fiscal year 2013 (FY13), the World Bank Group’s financial commitment to SSA, was US$15.4 billion:

| 8

Alliance for Financial Inclusion

The African Development Bank (2014) reported that overall, only 23% of adults in Africa have accounts in formal financial institution which implies that 77% of African adults are financially excluded.

To achieve optimal level of financial inclusion in Africa, 26 African countries are registered members of the Alliance for Financial Inclusion (AFI).  

MULTILATERAL AGENCIES’ ACTIVITIES IN SUB-SAHARAN AFRICA

The Lomé Conventions (now Cotonou Agreement)

The objectives of the Cotonou Agreement are to reduce poverty, promote sustainable development and the progressive integration of the ACP countries into the global economy. Under the agreements aid and investment commitments by EU to ACP States for the first five years amounted to ECU 12 billion.

|1 9

INTRODUCTION: NIGERIA AT A GLANCEINTRODUCTION: NIGERIA AT A GLANCE

Sources:

Central Bank of Nigeria

National Bereau of Statistics

EfinA

Population 168.3 millionGDP Growth Rate 7.41Inflation Rate 8%Nominal GDP $509,970.14GDP Per Capita $2,921.45Financial 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 (2013)

|1 10

NIGERIA’S AGRICULTURAL POTENTIALSNIGERIA’S AGRICULTURAL POTENTIALS

84 Million Ha of ArableLand; 40% utilization

AgriculturalPotential

Large InternalMarkets

Water

110 Million Youth in the work force by 2020

Low wages foragriculturalintensification

168.3 Million people, projected to grow to 470 Million by 2050

279 Billion CubicMeters of SurfaceWater

Untapped irrigationpotential with 3 ofthe 8 major riversystems in Africa.

| 11

• Nigeria’s food import bill is exceptionally high. The top four food imports consume over N1.3 trillion Naira in foreign exchange every year.

• Relying on the import of expensive food on global markets fuels domestic

inflation

• Excessive imports put high pressure on the Naira and hurt the economy• Nigeria is importing what it can produce in abundance.

• Import dependency is hurting Nigerian farmers, displacing local production and creating rising unemployment

• Import dependency is not acceptable, nor sustainable fiscally, economically or politically

Wheat

Rice

Sugar

Fish

Food Import Dependency is Hurting Nigeria’s Economy.Yearly, Nigeria Imports over N1.127 Trillion or (aboutUS$11 Bn) in Wheat, Rice, Sugar and Fish

Nigeria’s Imports Key Takeaways

Nigeria’s top 4 ImportsMeasure: Annual Food Imports (N’Billions)

• Nigeria is World’s largest Importer of US hard red and white winter Wheat.

• World’s number 2 largest importer of Rice.

| 12

YIELD PER HECTARE: This is a main driver of agricultural competitiveness.

Nigeria's yield per hectare is 20% of the world’s highest yield compared to some other similar developing countries that achieve 50%.

Annual growth rates1961-2008

Comparison of Nigeria’s crop yields with that of other leading agricultural countries

Index of crop yields relative to Nigeria’s yields in 1961 Measure: Relative growth in crop yields

| 13

INPUTS: Nigeria has one of the lowest usage rates of agricultural Inputs. Nigeria ranks at the bottom on agricultural indices

Mechanization Intensity: 10 tractors per 1000 Ha compared to Indonesia with 241 tractors per 1000 Ha

Irrigation: 0.8% of arable landirrigated compared to Thailand’s 28% of arable land irrigated

Nigeria’s low fertilizer utilizationMeasure – Kg per Hectare

Nigeria’s low utilization of improved seedsMeasure – Percent of farmers

|

Nigeria’s Unemployment Challenge

Nigeria’s unemployment rate is spiraling upwards, growing at 11% per year. The youth of the nation are the most impacted, with a youth unemployment rate that is over 50%.

Spiraling general unemployment rate growing at 16% per year

Youth unemployment rate

Nigeria’s unemployment rate is spiraling, driven by the wave of 4 million young people entering the workforce every year with only a fraction able to find formal employment.

Agriculture has demonstrated an ability to solve this challenge with countless potentials that have remain under-exploited.

|

Nigeria’s Infrastructure Challanges

INFRASTRUCTURE

• Energy (electricity)

• Road Network

• Water Resources

• Rail System

• Telecom

INFRASTRUCTURE

• Energy (electricity)

• Road Network

• Water Resources

• Rail System

• Telecom

15

Only 40 per cent of Nigerians have access to electricity and Nigeria currently requires more than 10,000mw. Current power generation is 3,800 megawatts (mw)

Nigeria is currently investing about N82.5 billion into the sector. This is less than a quarter of the expected investment in water management annually from the three tiers of government.

Nigeria’s railway infrastructure is in dilapidated state with very limited coverage.“Locomotive availability of 6 per cent in Nigeria is dismal compared with 75 per cent for South Africa..

Only 80% of federal roads in Nigeria are partially paved, disallowing proper coverage of the nation’s over 900,000km2 landmass. Over N300 billion will be required to construct and maintain the balance of 20%.   

| 16

WHAT TO DO TO BOOST NIGERIA’S AGRICULTURAL SECTOR

• All relevant stakeholders to intensify efforts in de-risking the agricultural value chains where Nigeria has comparative advantage

• Treat agriculture as a business

• Employ the value chain approach by integrating food production, storage, food processing and industrial manufacturing (Farm to Fork)

• Initiate Investment-driven strategic partnerships with the private sector

• Increase Investment drives to unlock agriculture potential of Nigerian states.

Nigeria can exploit its agricultural potential to meet the domestic staple food needs and unleash its intermediate/finished agricultural export potential.

This potential however, cannot be achieved without a total overhaul and transformation of the of the agricultural sector.

| 17

VISION AND STRATEGY OF AGRICULTURAL

TRANSFORMATION AGENDA (ATA)

The realization of the enormous benefits to be derived engendered the President Jonathan’s administration to embark on the on-going sector transformation-Agricultural Transformation Agenda(ATA.

VISION OF ATA

•To achieve a hunger-free Nigeria through an agriculture that drives income growth.

•Accelerate the achievement of food and nutritional security

•Employment generation

•Grow wealth for millions of farmers

STRATEGY OF ATA•Growth Enhancement Support Scheme (GES)•New fertilizer procurement and distribution approach•Establishment of marketing institutions•Fixing the financial value chain•Restructuring of agricultural investment framework.•NIRSAL to drive achievement of market oriented/market surplus into a commercialized system.•Establishment of Staple Crops Processing Zones.

| 18

KEY POLICIES TO ACHIEVE AGRICULTURAL TRANSFORMATION AGENDA (ATA)

KEY POLICIES

Agricultural policies

Creation of institutions to support ATAMarketing Corporations to replacing marketing boardsTransforming the Agricultural Research Council (ARCN) into a National Agricultural Transformation agency like EMPRAPA in Brazil.Ensure guaranteed minimum price for food cropsIrrigation facilities to be rapidly revamped/expandedLand Use Act to be revised to enable investors have easier access

Industrial Policies Gradually move from fertilizer consumption subsidies to support for local fertilizer manufacturing.

Market Development10% Cassava flour substitution Blending of 10% ethanol with petrol.

Fiscal PoliciesZero tariffs (customs, excise and value added) for import of agricultural equipment.Tax holidays for investors putting processing plants in staple crop processing zones.

| 19

KEY POLICIES TO ACHIEVE AGRICULTURAL TRANSFORMATION AGENDA (cont’d)

Fiscal Policies (cont’d)

Increase levy (import, excise duties) on any commodities that Nigeria can produce (starch, wheat and sugar). Supportive incentives for investors establishing blending plants for ethanol.

Financial Service PoliciesProvision of incentives to enhance farmers’ access to weather index insurance.Removal of current monopoly on agricultural insurance by National Agricultural insurance Company (NAIC); allowing private sector insurance companies to compete.

PRIORITY COMMODITIES

Cotton, Cassava, , Cocoa, Rice, sorghum, maize, dairy, beef, leather, poultry, oil palm, and fisheries.

EXPECTED IMPACT (2012 – 2015)

Jobs: 3.5 million jobs

Wealth: N60 Billion (USS380 million)from substituting 20% of bread wheat flour with cassava flour.

Food Security: Increase staple food by 20 million tons.

Rice: 2 million tons

Cassava: 17 million tons

Sorghum:1 million tons.

|

WHY NIGERIAN BANKS ARE NOT FINANCING AGRICULTURE

• Perception-High perceived risk -Lack of understanding of the agric. sector -High default rates from government-driven lending programs.-Do not understand agriculture as a business -Are unable to assess and price the risk elements and so want the sector de-risked to make it more attractive for financing.

• Sourcing of Loanable Funds -Banks borrow short but the Agric. Sector requires medium to long term funding• Covariant risks

-Inclement 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.

20

21

CBN’S INTERVENTIONS TO ENHANCE REAL SECTOR FINANCING CBN’S INTERVENTIONS TO ENHANCE REAL SECTOR FINANCING

POLICY AND REGULATORY PERSPECTIVE

PROGRAMME AND SCHEMES PERSPECTIVE

Credit Enhancement Mechanism

•Microfinance Policy (2005 reviewed 2011)

• Financial System Strategy 2020

•Non-Interest Banking

•Cashless Policy

•Adoption of a new banking model that promotes specialization by banks.

•The Agricultural Credit Guarantee Scheme Fund (1978)

•Interest Drawback Programme (2003)

•Agricultural Credit Support Scheme ACSS (2006)

•Entrepreneurship Development Centres EDCs (2006).

•Commercial Agriculture Credit Scheme CACS (2009)

22

CBN’S INTERVENTIONS TO ENHANCE REAL SECTOR FINANCING(CONT’D)

CBN’S INTERVENTIONS TO ENHANCE REAL SECTOR FINANCING(CONT’D)

POLICY AND REGULATORY PERSPECTIVE (cont”d)

PROGRAMME AND SCHEMES PERSPECTIVE (cont”d)

INSTITUTIONAL PERSPECTIVE

•NEXIM Bank (1991) • Bank of Industry (2001)

•Bank of Agriculture BOA (2010) • Infrastructure Banks (1992)

•Small and medium Enterprises Credit Guarantee Scheme SMECGS (2010)

•.N200 billion SME Restructuring/ Refinancing Facilities for SMEs (2010)

•Nigeria Incentive-based Risk Sharing System for Agricultural Lending –NIRSAL – (2010)

•Micro Small and Medium Enterprises Development Fund - MSMEDF – (2013)

Financial Inclusion Strategy•Financial Literacy•Consumer Protection•Mobile Banking•Agent Banking

|

AGRICULTURAL FINANCING INTERVENTIONS OF THE CENTRAL BANK OF NIGERIAAGRICULTURAL FINANCING INTERVENTIONS OF THE CENTRAL BANK OF NIGERIA

231

CENTRAL BANK OF NIGERIA

Nigeria Incentive Based

Risk Sharing System

For Agricultural Lending (NIRSAL)(2010)

Nigeria Incentive Based

Risk Sharing System

For Agricultural Lending (NIRSAL)(2010)

Commercial Agriculture

Credit Scheme (CACS) (2009)

Agricultural Credit

Support Scheme (ACSS) (2006)

Interest DrawbackProgramm

e (IDP) (2003)

Agricultural Credit Guarantee Scheme

Fund(ACGSF) (1978)

These endeavors are expected to facilitate the emergence of a strong and self-sustaining domestic economy in which private sector participation in the agricultural sector would ultimately be the major engine of growth.

Micro Small and Medium

Enterprises Development

Fund (MSMEDF)(2013)

Micro Small and Medium

Enterprises Development

Fund (MSMEDF)(2013)

Enabling Policies

|

THE NIGERIA INCENTIVE BASED RISK SHARING SYSTEM FOR AGRICULTURAL LENDING (NIRSAL): A VALUE CHAINS APPROACH TO

AGRIC. FINANCE

NIRSAL Background

•An initiative of the Central Bank of Nigeria (CBN), the Bankers’ Committee and the Federal Ministry of Agriculture & Rural Development.

• On August 9, 2010 signed an Agreement with the Alliance for a Green Revolution in Africa (AGRA) to develop this new initiative.

•NIRSAL is a Risk Sharing Fund to be administered by NIRSAL PLC. , a non-bank financial institution (NBFI).

NIRSAL Background

•An initiative of the Central Bank of Nigeria (CBN), the Bankers’ Committee and the Federal Ministry of Agriculture & Rural Development.

• On August 9, 2010 signed an Agreement with the Alliance for a Green Revolution in Africa (AGRA) to develop this new initiative.

•NIRSAL is a Risk Sharing Fund to be administered by NIRSAL PLC. , a non-bank financial institution (NBFI).

Definition and ObjectivesNIRSAL will de-risk lending to the Nigerian agricultural value chain.

•Strategy: Focuses on doing two things at once: -It fixes the agricultural value chains, so that banks can lend with confidence into value chains.-It will improve the capacity of banks through technical assistance and other strong incentives. •It will also build capacity of the agricultural value chain actors including extension workers and farmers to minimize default.

Definition and ObjectivesNIRSAL will de-risk lending to the Nigerian agricultural value chain.

•Strategy: Focuses on doing two things at once: -It fixes the agricultural value chains, so that banks can lend with confidence into value chains.-It will improve the capacity of banks through technical assistance and other strong incentives. •It will also build capacity of the agricultural value chain actors including extension workers and farmers to minimize default.

241

|

(NIRSAL): A VALUE CHAINS APPROACH TO AGRIC. FINANCE

• Definition and Objectives

• Seeks to leverage NIRSAL Fund to USD 3 billion to shore up total bank lending to agriculture from the current 1.4 in 2010 to 7.0 per cent by 2017.

NIRSAL Fund

NIRSAL Plc. has a seed fund of USD 500 million (N75 Billion) to be used to operate its five pillars as follows:

.

• Definition and Objectives

• Seeks to leverage NIRSAL Fund to USD 3 billion to shore up total bank lending to agriculture from the current 1.4 in 2010 to 7.0 per cent by 2017.

NIRSAL Fund

NIRSAL Plc. has a seed fund of USD 500 million (N75 Billion) to be used to operate its five pillars as follows:

.

FIVE (5) PILLARS OF NIRSAL•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).

Other SourcesNIRSAL will also collaborate with relevant Federal MDAs, State Governments and 3rd party capital providers (domestic and foreign, government and private) that want to co-invest in the Fund.

FIVE (5) PILLARS OF NIRSAL•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).

Other SourcesNIRSAL will also collaborate with relevant Federal MDAs, State Governments and 3rd party capital providers (domestic and foreign, government and private) that want to co-invest in the Fund.

251

|

THE NIGERIA INCENTIVE BASED RISK SHARING SYSTEM FOR AGRICULTURAL LENDING (NIRSAL): STRATEGY

26

Risk Sharing occurs in the form of selling Credit Risk Guarantee . . .

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

(face value)

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

Production -40%

Processing & logistics -20%

Guarantee Fee (1%)

NIRSAL Mechanics

Credit Risk Guarantee

(Face Value)Production: 75%

Processing: 50%

Logistics 30%

|

NIRSAL AS AN AUTONOMOUS ENTITY

•Approval has been granted for NIRSAL to operate as an independent entity.

NIRSAL AS AN AUTONOMOUS ENTITY

•Approval has been granted for NIRSAL to operate as an independent entity. 28

Achievements of NIRSAL

From Inception to April 2014•Forty (45) CRGs Covers valued N16.272 billion were issued to beneficiaries.

•Seventy three (73) IDPs valued N139.990 million, as at April 2014.•Under the Growth Enhancement Support (GES) Scheme, banks granted 113 loans valued N19.63billion to agro-dealer and seed companies .

From Inception to April 2014•Forty (45) CRGs Covers valued N16.272 billion were issued to beneficiaries.

•Seventy three (73) IDPs valued N139.990 million, as at April 2014.•Under the Growth Enhancement Support (GES) Scheme, banks granted 113 loans valued N19.63billion to agro-dealer and seed companies .

|1 29

BANK CREDIT TO AGRIC SECTOR 2009 - 2012

Following CBNs interventions in recent years, commercial banks’ credit to agriculture has increased from 1.4% in 2008 to 3.9% in 2012

| 30

i. Need for enabling environment

• Monetary and fiscal conditions (low inflation and favourable tax regimes)

• Infrastructure e.g. power, roads, water, telecommunications.

ii. Increased access to finance

iii. Access to technology

iv. Inputs access

• Access to packaging, quality control and agro-processing technologies.

v. Horizontal and vertical coordination among various stakeholders

vi. Market access: At international, regional and domestic levels.

vii. Best management practices

WAY FORWARD FOR NIGERIAN AGRICULTURE

| 31

i. Setting up of Specialized financial institutions to lend to fixed value chains.

ii. Infrastructure provision: Investment in the power, rural telecommunications and irrigation projects.

iii. Setting up of fertilizer plants.

iv. Tractor assembly plants and tractor hire services.

v. Seed production , multiplication and Research and Development.

vi. Building of warehouses for effective and efficient Warehouse Receipt Management System.

WINDOWS OF OPPORTUNITIES FOR INVESTMENT TO BOOST NIGERIA’S

AGRICULTURAL DEVELOPMENT

|

vii. Establishment of processing plants to mitigate colossal produce waste due to lack efficient storage

facilities.

viii. Partnering with NIRSAL Plc. as fund supplier where good returns on investment is assured.

ix. Setting up private insurance companies to provide weather- based insurance services and

vii. Haulage business and general logistics.

vii. Establishment of processing plants to mitigate colossal produce waste due to lack efficient storage

facilities.

viii. Partnering with NIRSAL Plc. as fund supplier where good returns on investment is assured.

ix. Setting up private insurance companies to provide weather- based insurance services and

vii. Haulage business and general logistics.

321

WINDOWS OF OPPORTUNITIES FOR INVESTMENT TO BOOST NIGERIA’S AGRICULTURAL DEVELOPMENT (cont’d)