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Banks’ lending to agric underperforms CBN’s 7% target

*Projected to remain below 5% by 2021
*Experts blame dearth of bankable projects, weak fiscal support

By Babajide Komolafe

Anks’ lending to the agricultural sector is lagging behind the seven percent target of the Central Bank of Nigeria (CBN) for the sector by 2021.

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Financial Vanguard      analysis of share of agriculture (agric) sector in total banks’ credit for four years, from 2015 to 2019, shows annual growth rate of five percent, as against 40 percent annual growth rate required to meet the CBN’s target for 2021.

The CBN in 2011 announced a ten year target of seven percent credit allocation to the agricultural sector. To achieve this target, the apex bank introduced some measures, including the establishment of the Nigerian Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) and intervention funds like the Commercial Agricultural Credit Scheme (CACS) and the Anchor Borrowers Programme (ABP).

The seven percent target was further affirmed in the NIRSAL document, with the CBN saying that part of the value proposition for the initiative was to, “increase lending to agriculture from 1.4 percent   to 7 percent of total banks’ credit to the economy within 10 years, with NIRSAL becoming economically self-sustaining”.

This target translates to 400 percent growth in agric sector’s share of total banks’ credit from 2011 to 2021, and hence annual growth rate of 40 percent.

However, Financial Vanguard analysis of data from National Bureau of Statistics (NBS) on banking sector credit to the various sectors of the economy from first quarter of 2015 (Q1’2015) to first quarter of 2019 (Q1’2019) revealed sluggish growth rate of five percent per annum in the agric sector’s share of total banks’ credit during the period.

The NBS data showed that agric share of banks’ credit rose from 3.49 percent in Q1’2015 to 4.21 percent as at Q1’2019, indicating 20 percentage point growth over the four years period or five percent annualized.

This, however, is far below the average growth of 42.6 percentage point recorded by top five sectors during the four year period.

The sectors, which account for 44 percent of total banks’ lending of N13.2 trillion as at Q1’19 are:    Power & Energy (services), which recorded 63 percent growth in share of banks’ credit;  followed by the public sector which recorded 56 percent growth;    Oil & Gas (industry) which recorded 42 percent growth;  finance & insurance sector which recorded 30 percent growth;    and Power & Energy (Industry) which recorded 22 percent growth.

In absolute terms, banks’ lending to the agric sector rose to N638.5 billion as at Q1’19 from N466.4 billion as at Q1’15, indicating 37 percent increase, translating to annual average growth rate of 9.25.

However the N638.5 billion credit allocation to the agric sector as at Q1’19 is N461.5 billion  below the target N1.1 trillion, or 7.0 percent of the N15.2 trillion total bank credit  during the period.

The above implies that banks will have to almost double their lending to the agric sector about N1.2 trillion by the end of 2021 in order to meet the CBN’s target of 7.0 percent agric share of banks’ credit.

This feat, according to agribusiness experts and financial analysts, who spoke to Financial Vanguard, is not feasible due to a host of factors which combine to impede growth of credit extension  to the sector.

They stressed that the agric sector is still high risk for banks due to weak fiscal support for the sector and limited capacity of agribusiness owners which combine to make many agric projects un-bankable.

“The end of the value chain where most people in the industry play (production) is not lucrative and as profitable as it should be. So the sector is unattractive to the banks for lending”, said Kunle Adebiyi,  Chief Executive Officer, Kadeb Farms, located in Ogun State.

Speaking further, he said: “Despite all of CBN’s     intervention, the commercial banks still have to guarantee the loans to individual farmers.    So it’s as if the power of lending still lies with the commercial banks, as well as the responsibilities over such funds.

“However, the level of illiteracy in the agric sector is still very high amongst most low and middle level players in the industry, hence the unavailability of documents and data to prove that the Return On Investment (ROI)  is  worth   borrowing to finance”.

On her part,    Mrs. Grace Ajayi, an Agricultural Consultant at SITOG Limited,      blamed the dearth of bankable agric projects on the weak fiscal support from the federal government.

She said: “There are lots of laudable interventions in the agricultural sector emphasising on increased production without commensurate efforts at post harvest management and industrial usage.

“Government agricultural policy needs to be strengthened, government needs to make strict policy, totally ban importation of agro foods and then give the necessary support to the farmers. “When these are in place it is even the banks that will be after the farmers for credit facilities.

“As at today there are many un-bankable projects in agriculture in which banks do not see future in them and banks cannot or will not be able to justify their financial commitment.

“Until when government policies are backed up with action there cannot be any lending to agric sector from banks.”

While acknowledging the unattractiveness of the agric sector to banks due to many uncontrollable and natural factors that can negatively influence the performance of the funds lent to farmers, Executive Director of Agrotrends Nigeria, Mr. Adebanjo Daniel, however, stressed that banks are also culpable in the sluggish growth of credit to the agric sector.

Citing    deliberate delay of credit approvals    and    diversion of funds    by banks, Adebanjo said: “Financial institutions intentionally delay the process of  processing farmers’ loan application and also elongate    the    period of disbursement which at the later end the fund can not be immediately used by the farmer as the season for such particular crop might have elapse.

“Also there have been several allegations of funds diversion by financial institutions.   This is really true;  the small scale farmers are being frustrated in the application process.   Hence,  they abandoned the processing at half way which makes it easier for financial institutions to divert the fund to other sectors.”

However,    the Head of Agribusiness unit in one of the Tier-2 banks said    the problem is more about lack of acceptable collateral by several agribusinesses and the high risk profile of the agric sector due to unmitigated factors such as weather, performance and yield risks

Speaking on condition of anonymity, he said: “More often, what we see is a situation where agribusinesses are unable to meet the minimum Risk Acceptance Criteria (RACs) to access available loans.

“Usually it is not an issue of the bankability of the projects, but more of the capacity of the agricultural projects to meet banks’ RAC.”

Confirming the above positions,  Tunde Abidoye,  analyst at FBNQuest, said:    “A number of issues are responsible for the weak credit extension to the agriculture sector.   Some of the factors include but are not limited to:    Information asymmetry exhibited by industry participants and lack of understanding of bank loan requirements; Bureaucratic and cumbersome loan process; Limited understanding of the sector by the banks and perception of the sector as a high risk sector; The perception of higher default rates by farmers; Inaccessibility of credit to rural farmers  and their lack of organisation to units that provide opportunities for risk sharing.”

Fiscal policies required

Speaking on the way forward, the experts stressed the need for radical fiscal policy measures, including import substitution policies to make the agric sector attractive to banks

“The government’s efforts in boosting the agricultural sector are commendable but there is more ground to be covered including promoting import substitution for the benefit of agro-allied industries as well as a review of government policies on taxation, duty payments and deferrals to provide a better conducive operating environment for agribusinesses”, said the head of agric unit in a bank on condition of anonymity.

Speaker further, Adebiyi, the CEO of Kadeb Farms said: “I believe government needs to do more in directly identifying the real farmers and set up special purpose vehicles (SPVs) to drive the process of ensuring only agricultural projects are financed with funds provided, much more by financing the needs directly rather than releasing money to players, which could be at risk of being diverted into more profitable ventures.”

Citing the example of India on the need for strong fiscal support for the agric sector, Mrs. Ajayi said: “There should be increased support for agricultural research and extension, it is very important to strengthen agricultural research activities through increased funding and proper coordination.

“India  for example,  has government policy in which they feed themselves even though the population is over one billion people. Now India is known as an agricultural country because in every home they must plant. This is possible because they have a very strong government policy, unlike Nigeria.

“In summary, financial institutions will be attracted to agric enterprises that are capital intensive and that add value to the economy if government strengthen its policies on Agriculture”.

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