Funding Agriculture in Nigeria: The Role of NIRSAL

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ZURICHCopyright © 2012 by NIRSAL PIO/ Central Bank of Nigeria

This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion.

NIRSAL

Funding Agriculture in Nigeria: The Role of NIRSAL

By

NIRSAL PIO

(Central Bank of Nigeria)

At

BusinessDay Agribusiness Conference

June 7th, 2012

2AFRACA Session 06 June 2012 Copyright © CBN/NIRSAL — Confidential

Confidential

What Is the Current State of Nigeria’s Agricultural Finance?

Today Nigeria’s formal financial system is lending ~2.5% of all formal credit to the agricultural sector

Today’s levels represent progress versus 2 years ago when only about 1% of all credit went to agriculture; note that since 1980s, levels of lending have remained low despite a series of Central Bank interventions e.g.

– Agricultural Credit Guarantee Scheme Fund (ACGSF): ₦52 billion guaranteed– Agricultural Credit Support Scheme (ACSS): ₦50 Billion pool– Commercial Agriculture Credit Scheme (CACS): ~ ₦200 Billion in on-lending

As a result of the lessons we have learned running such financing schemes, CBN decided to change how it supports the financing of agriculture; changes included but were not limited to:

– Focus more on guarantees rather than placing credit/funds directly with banks– Use mix of incentives and penalties to shape financial system behavior– Address challenges in the value chain by providing extensive technical support, etc

In 2011, CBN launched a new agriculture financing strategy and platform: Nigeria Incentive Based Risk Sharing System for Agricultural Lending (NIRSAL)

– A key metric of NIRSAL’s success will be raising formal lending to ~10% by 2017Source: NIRSAL Analysis


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NIRSAL is a public private initiative designed to appropriately define, price, and share agribusiness related credit risk– NIRSAL is currently a project office inside CBN but in process of securing

permissions to register as a public limited corporation

NIRSAL is a public private initiative of the following partners:– Central Bank of Nigeria (CBN)– Bankers Committee (CEOs of deposit money banks, specialized banks, and

discount houses)– The Federal Ministry of Agriculture & Rural Development

NIRSAL mobilizes financing for Nigerian agribusiness by using credit guarantees to address the risk of default – NIRSAL is a flexible financing tool designed to change the behavior of financial

institutions– Commercial in design and execution including the cost of capital– Covers all crops and livestock activities in Nigeria– Builds on a legacy of previous CBN interventions in agriculture that has helped

create thousands of jobs

What Is NIRSAL?


Confidential

4

Agriculture value chain

FarmersAgro

Dealers / Storage

Input producers

Agro processors

Industrial manu-

facturers

Distributionand exports

Agricultural financing value chain

LoanProductDevelop.

Loanorigination

CreditDistribution

CreditAssessment

Managing and pricing

for risk

LoanDisbursement

1 Includes working capital loans; fixed asset finance; trade finance

Enablers

Infrastructure Credit bureau Policies Extension services Price stability boards

What is NIRSAL’s strategic objective?


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5

NIRSAL (₦75 billion assets to stimulate lending by banks and other financial players )

De-risk agriculture finance value chain

Build long-term capacity

Institutionalise incentives for agriculture lending

NIRSAL Objective

Goal

Expand bank lending in agricultural value chains

Risk sharing Facility

(₦45B)

Insurance Facility (₦4.5B)

Technical assistance

facility (₦9B)

Bank incentive

mechanism (₦15B)

Agricultural bank rating

scheme (₦1.5B)

Shares lending risks with banks (e.g. 75% of loss incurred)

Links insurance products to the loan provided by the banks to loan bene-ficiaries

Builds the capacity of banks, micro-finance institutions

Build capacity of agricultural value chains

Expand financial inclusion

Targets incentives that move banks to a long term, strategic position and commitment to agricultural lending

Rates banks according to their effective-ness of lending to agriculture.

What Are the Main Elements of NIRSAL?


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What Market Does NIRSAL Serve? (1 of 2)

NIRSAL provides credit guarantees to all creditworthy participants across multiple crop, livestock and supporting services values chains

NIRSAL estimates that the addressable market it serves is a revolving N600 – N900 billion market for working and growth capital– For example: Cotton (N36 billion); rice (N70 billion); cassava (N200 billion)– NIRSAL guarantees can be issued for as long as the borrower requires e.g.

10 year guarantees– NIRSAL has no limit on the size of individual guarantees it can issue; the

limit is imposed by NIRSAL’s balance sheet which today can guarantee up to N450 billion in loans

NIRSAL’s guarantees can be issued to borrowers (via their credit provider) who are:– Borrowing using a variety of debt instruments e.g. revolving loans, term

loans, bond issuances, convertible debt, etc– Borrowing in both local and foreign currencies (via swap arrangements)


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What Market Does NIRSAL Serve? (2 of 2)

The full scale planning assumption is based on upgrading the production for 160,000 hectares or N9.6 billion in financing for lenders:

Category Proxy Measure Total Niger Rice Requirement

Cost/Unit Total Cost Per Hectare Costs

Fertilizer (macro)

• 400kg per hectare (8 bags)

• 160,000 hectares

• ₦ 5,500/bag • ₦7.04 billion • ₦44,000

Micro-Nutrients • 1 kg per hectare

• 160,000 • ₦ 1,500 • ₦0.24 billion • ₦1,500

Crop Protection

• xx per hectare • TBD • ₦xx/hectare • ₦160 million • ₦1,000

Seeds • 50kg per hectares

• 160,000 hectares

• ₦250/kg • ₦2 billion • ₦12,500

Irrigation Services

• 10,000 hectares

• ₦1000 per hectare

• ₦160 million • ₦1,000

Total Costs • ₦60,000

Price of Rice Paddy

• 75kg bag or 13.33 bags per ton

• N5,000/bag • ₦10.6 billion • ~₦66,600

Price of Rice • 50kg bag or 20 per ton

• N5,000/bag • ₦16 billion • ₦100,000


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Categories Attributes and Description

Seller • NIRSAL PIO doing business as the Central Bank of Nigeria

Buyers • Cooperative groups if less than 10 hectares, and individual farmers or corporations if more than 10 hectares

CRG Product • Provides credit risk guarantee on maximum of 75% of loan values

Guarantee Fee • 0.25% per month on outstanding protected principal and interest

Exclusions • Covers only credit related losses i.e. default by cooperative’s member

Interest Drawback Program (IDP)

• Average of 30% of interest cost rebated every 90 days if loan remains in good standing (no partial or full default)• NIRSAL retains full discretion on who receives subsidy and who does not

Sample Technical Assistance

• Extension Support: Work with cooperatives to create temporary / seasonal network of commercial para-professional extension advisers to complement ADP officers• Processor Training: Support expanded private sector training of processors to ensure that certain customer driven quality standards are met

• Market Access / Off-Taker Agreements: Support brokering of purchase agreements including overseeing negotiations if necessary, or providing financial analysis on market dynamics and international pricing

Source: NIRSAL Analysis

What Does NIRSAL’s Core Product Offer Actually Look Like?


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Working with NIRSAL – The Mechanics

Since April 2012, NIRSAL is open for business and now ready to sell credit guarantees– Any contracts sold today will be as CBN, and then assigned to the future NIRSAL

legal entity that is in the process of formation

For the purchase of CRGs, we only interact with our wholesale counterparties, e.g. deposit money banks, discount houses, asset managers and trade finance providers

Financial institution discusses potential lending with a borrower, and agree on terms of a loan package

– During this period, the lender can reach out to NIRSAL to seek out clarifications on the specifics of the transaction as well as structuring considerations

– Lender submits 2 documents to NIRSAL with CRG application form e.g. Draft Offer Letter and copy of the report submitted to credit committee

– NIRSAL has provided a list of what should be available for inspection should we need more due diligence e.g. certificates of registration / bank statements, etc

NIRSAL reviews CRG application and within a maximum of 10 business days reverts with a decision on the CRG and/or IDP

– Decision communicated to financial institution– Institutions encouraged under guidelines to securitize loan portfolio and expand

liquidity


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Current “Live “ Transactions (June 2012)

Cassava– Planting for harvest in 18 – 20 months from summer 2012; yield target is 20 – 25

tons/hectare with a cost of N100,000 per hectare – At target of 40 million tons or 2 million hectares, that equals ₦ 200 billion in working

capital requirement– Cassava chips export starting in June 2012; training now underway for farmers and

chip processors in 3 regional centers around Nigeria; chip exports require ₦ 1.5 billion in financing per cycle

Rice– 2012 planting season financing framework developed based on session in Minna in

late April 2012– Financing expected to cover supply of variety of inputs e.g. fertilizer, micronutrients,

seeds and crop protection chemicals– Requirement estimated at ₦9.7 billion for Niger State the largest producer;

nationally, value will reach ₦40 – ₦70 billion if fully commercially financed

Cotton– Financing discussion underway with farmer association (NACOTAN) and private

cotton company (WACOT)


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Financing Cotton Example: The NCA Strategic Agenda for Cotton

The 2012 39th meeting of the National Council of Agriculture & Rural Development identified a set of strategic targets for the cotton value chain to be executed in 11 states of the federation:

– Katsina, Zamfara, Gombe, Adamawa, Borno, Niger, Kano, Kaduna, Jigawa, Oyo and Ogun

Outlined below are the main targets set by the NCA i.e. raise seed cotton production to 600,000/annum by 2015

To advance our discussions today, we have estimated some of the potential implications of the NCA’s targets using pro-forma figures

Our focus today therefore is brokering a dialogue regarding how we use the commercial system of financing (and potential state trust funds) to generate about ₦60 billion in financing for cotton production

Year Seed Cotton Production (metric tons) Yield/Hectare Implied Hectares At ₦60,000 Cost per

Hectare (pro-forma)

2011 125,000 0.6 208,333 ₦12.5 billion

2015 600,000 1 600,000 ₦36 billion Source: NCA 2012 (Report of Officials), NIRSAL Analysis


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Financing Cotton Example: How We View Value Chain

The cotton value chain contains a range of participants, a number of whom are in varying degrees of “readiness” to create value. In order for financiers to step in, explicit action will be required to ensure optimal performance of each segment:

Input SuppliersFarmers Association

/CooperativeGinners

Off-takers (domestic and

foreign)

Domestic Textile Industry

NIRSAL credit guarantees

Financial Institutions credit lines / loans

Quality Control : New cotton bags; state & federal inspectors; SGS

Private extension + ADP

Source: Cotton Value Chain Meeting (April 2012), NIRSAL Analysis


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Financing Cotton Example: Framework

Farmer cooperative organizes its members into clusters of farmers e.g. by senatorial district or local government or ward or any other aggregation that is practical

– The exact land holding for each member is known, and given a target yield e.g. 1 to 2 tons/hectare, volume for that ward/LGA/district/state can be forecast

– Cooperative also signs large scale input agreement with consortium of input suppliers

– Cooperative organizes system of okada and trucks to collect raw cotton from farms, or prompts the farmers to bring their cotton to designated ginneries; system can also be used to deliver inputs early in the season

In parallel, farmer cooperative signs agreement with network of ginneries to gin the cotton

– Exact ginning capacity required can be estimated based on average ginning speed per day

– Agreement will include financial terms e.g. price / ton or bag ginned i.e. ginneries are paid as a service provider / toll ginner

– State inspectors will be present at the site of each ginnery to supervise grading and packaging

In parallel, farmer cooperative signs off-taker agreement with end users of cotton i.e. domestic or foreign buyers

– Based on price and volume agreed, cooperative can offer its members a price for their raw cotton that reflects the value of final markets

1

2

3

Source: NIRSAL Analysis


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In Conclusion . . .

CBN’s agricultural intervention has led to increased access to finance by farmers and other stakeholders

These initiatives have promoted the growth of the agricultural sector, facilitated employment and income generation in the rural areas

Going forward, as NIRSAL takes its role as CBN’s primary support for agribusiness, we expects its management will continue to refine its scope, offerings and market presence

We have set aggressive targets but are putting in place a process to achieve these

Achieving our credit formation objectives will require significant investment and changes in behavior (especially among deposit money banks) but we are cautiously optimistic based on the progress thus far

Therefore, we welcome further partnership between NIRSAL/CBN and the parties assembled here today

Funding Agriculture in Nigeria: The Role of NIRSAL

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