Asoko Sector Brief: Nigeria Agri-Finance Report Q2 2016

With agriculture representing more than one-third of Nigeria’s GDP on an annual basis and accounting for more than half of total employment, the government has sought to increase credit to commercial and smallholder farmers alike.

High interest rates, poor bookkeeping and a lack of collateral have historically limited the ability of smaller agricultural producers to tap commercial loans. As a result, a spate of initiatives in recent years from the Ministry of Agriculture and Rural Development and the Central Bank of Nigeria has sought to encourage private sectors loans to the sector.

Among the new instruments are the Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL), which was rolled out in 2010 and provides various levels of guarantee to agricultural creditors; the Commercial Agricultural Credit Scheme (CACS), which was unveiled in 2009, to provide single-digit interest rates for large-scale commercial farmers; and the Agriculture Credit Support Scheme (ACSS), which was launched in 2006 to help subsidise interest rates for agriculture borrowers.

Another scheme, the 39-year-old Agricultural Credit Guarantee Scheme Fund (ACGSF) was revamped in 2011 to mandate participation from commercial banks, fining them if they do not comply. Private participation not unexpectedly has increased steadily: loans guaranteed under the ACGSF in conjunction with private lenders amounted to nearly 70,000 projects in 2015, 30% up from five years earlier. The bulk of those projects – which were largely related to staple production, such as cassava and grains – involved microfinance lenders, along with a handful of commercial banks including First Bank and Union Bank.

The recent reforms have helped to increase private sector participation in agricultural lending, and more than 20 commercial lenders – including United Bank of Africa and Zenith Bank – currently offer agriculture-specific products, according to Asoko research. While overall extension of credit from banks to the agriculture sector currently stands at less than 4% of the Nigerian total (2015), this is a significant increase from 2010, when it stood at less than 1%.

However, it has not all been smooth sailing, and banks still face challenges in ensuring repayment from smaller borrowers. The primary agricultural lender, for example, the state-owned Bank of Agriculture, experienced a spike in its losses from $929,000 in 2014 to $36m in 2015, largely borne of bad debts with its SME clients in the sector.