Leveraging the NIRSAL Credit Risk Guarantee to Increase Lending to Agribusinesses in Nigeria

Leveraging the NIRSAL Credit Risk Guarantee to Increase Lending to Agribusinesses in Nigeria A position paper by Feed the Future Nigeria Agribusiness Investment Activity October11, 2022 The agricultural sector is central to Nigeria’s economy, as it currently accounts for 23% of the country’s Gross Domestic Product (GDP) and provides employment to over 60% of the country, according to the National Bureau of Statistics’ 2022 report. If the sector’s contribution to GDP will increase to 50% by 2031, as projected, there is a need to increase finance facilitation to the agricultural sector.

In 2013, the Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) was established as a wholly owned subsidiary of the Central Bank of Nigeria, in collaboration with the Federal Ministry of Agriculture and Rural Development (FMARD) and the Nigerian Bankers’ Committee, to help stimulate the sustainable flow of finance into the agricultural sector by institutionalizing strong incentives and providing technical assistance to agribusinesses and financial institutions. One of the ways NIRSAL is doing this is through its Credit Risk Guarantee (CRG) instrument.

During a recent webinar hosted by the Feed the Future Nigeria Agribusiness Investment Activity (“the Activity”) on “Leveraging the NIRSAL Credit Risk Guarantee to Increase Lending to Agribusinesses in Nigeria,” stakeholders, including financial institutions and agribusinesses, acknowledged the CRG as a useful tool for bridging the funding gap for agribusiness micro, small, and medium enterprises (MSMEs) in Nigeria.

The participants also expressed concerns regarding the use of the CRG to facilitate lending to agribusinesses in Nigeria. A key outcome from the webinar’s dialogue is this position paper, which helps to document the insights from the webinar and communicate key recommendations for NIRSAL’s consideration and necessary action.

The Activity agrees that the CRG is a valuable tool for de-risking lending to the agricultural sector in Nigeria, especially seeing as many agribusinesses, especially micro, small and medium enterprises (MSMEs), may not always be able to fully meet the collateral requirements of commercial banks. Hence, we are encouraged by this opportunity to engage and support the good work that NIRSAL is set up to do, through constant feedback, interactions, and iterations that can continue to make the agricultural finance ecosystem more efficient and sustainable.

The following insights and feedback from the webinar regarding the NIRSAL CRG are relevant: ▪

Adoption – The commercial banks in attendance confirmed that only around 7% of their agribusiness portfolio is covered by the NIRSAL CRG. This may be an important indication of some reluctance in adoption owing to many factors including those stated below.

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Process – the banks expressed some reluctance to facilitate the CRG for their agribusiness clients, as they describe the process as cumbersome and inconsistent. The banks are concerned about the unpredictability and inconsistency in the processing of claims and Interest Draw Back (IDB).

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Cost – the banks also expressed concerns around the cost of adoption, particularly regarding the cost of monitoring and evaluation, which, according to them is, in some cases up to 300% higher than what is obtainable from competitors, making the CRG more expensive to adopt.

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Timing Difference – the banks also expressed concerns about the mismatch in the period between the issuance of the CRG and the booking of the loan, noting that, in their experience, there were times when the CRG expired before the loan tenure, potentially exposing the bank to uncovered losses.

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Turnaround Time – stakeholders also expressed concerns over the slow turnaround time with the CRG, which they attribute to lack of synergy between NIRSAL and financial institutions.

Recommendations: We recommend that NIRSAL engage even more frequently with the financial institutions to receive these and other types of feedback more regularly and use such feedback as an opportunity to review product features, processes, provide guidance, create synergies, and promote wider adoption of the CRG, which is largely acknowledged as a crucial de-risking tool in principle. Some banks acknowledged that they have seen instances of a quick turnaround time with the CRG, like NIRSAL has often described, e.g., a 10-day turnaround time; but they seem to consider it an outlier occurrence. This reality is what we hope can become commonplace to drive adoption, just by the testimony of users. We are encouraged that NIRSAL accepted our invitation and engaged intensively during the webinar that was attended by over 100 stakeholders. We encourage NIRSAL to investigate the concerns raised and address them as best and quickly as possible.

The Activity hopes to continue to engage NIRSAL as well as other stakeholders within the ecosystem, to help ensure that the tools available to ensure a sustainable flow of finance are visible, efficient, and more widely adopted. The Activity will continue to partner with NIRSAL to strengthen capacity to develop guarantee and co-guarantee products for sustainable financing, thus making the agri-finance market work more effectively for MSMEs.