The agricultural sector is central to Nigeria’s economy, accounting for 40% of the Gross Domestic Product (GDP) and providing over 60% of employment. However, the sector represents only 1% of exports.

Over the last decade, agricultural growth has slowed down, and today it is underperforming despite enormous potential. To reverse the trend, there is a need to tackle some of its major challenges, such as low productivity, poor technology and cultural practices, low research and development, and underfinancing of the agricultural value chain.

In particular, funding levels in the agricultural sector stand at about 2% of the total lending of banks, compared to 6% in a country like Kenya. Some of the reasons for the low funding include a lack of understanding of the agricultural sector, perceived high risks, complex credit assessment processes/procedures, and high transaction costs.

Addressing these issues requires an innovative approach, hence the introduction of the Nigerian Incentive-Based Risk Management System for Agricultural Lending (NIRSAL).

The NIRSAL Concept

The Nigerian Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL)

NIRSAL is a dynamic, holistic approach that tackles both the agricultural value chain and the agricultural financing value chain. NIRSAL does two things at once: it fixes the agricultural value chain so that banks can lend with confidence to the sector, and it encourages banks to lend to the agricultural value chain by offering them strong incentives and technical assistance.

NIRSAL emphasizes lending to the value chain and to all sizes of producers unlike previous schemes, which encouraged banks to lend without a clear strategy to the entire spectrum of the agricultural value chain.

There are five pillars to be addressed by an estimated USD 500 million of Central Bank of Nigeria (CBN) funds, allocated as follows:

1. Risk-Sharing Facility (USD 300 million): This component addresses banks’ perception of high risks in the sector by sharing losses on agricultural loans.

2. Insurance Facility (USD 30 million): The facility’s primary goal is to expand insurance products for agricultural lending, from the current coverage to new products such as weather index insurance and new variants of pest and disease insurance.

3. Technical Assistance Facility (USD 60 million): This will equip banks to lend sustainably to agriculture, help producers borrow and use loans more effectively, and increase the output of better-quality agricultural products.

4. Holistic Bank Rating Mechanism (USD 10 million): This mechanism rates banks based on two factors: the effectiveness of their agricultural lending and the social impact, making the ratings available to the public.

5. Bank Incentives Mechanism (USD 100 million): This mechanism offers winning banks in Pillar 4 additional incentives to build their long-term capabilities to lend to agriculture. It will be in the form of cash awards.

Crop Value Chains as Pilots

In the first instance, six pilot crop value chains have been identified, based on existing crop production levels and potential in six high-potential breadbasket areas. The crops are:

i. Tomatoes

ii. Cotton

iii. Maize

iv. Soybeans

v. Rice

vi. Cassava

NIRSAL Targets

The following targets have been set for NIRSAL:

i. Generate an additional USD 3 billion of bank lending within 10 years to increase agricultural lending from the current 1.4% to 7% of total bank lending.

ii. Increase lending to the “pooled” small farmer segment to 50% of the total (typically, banks do not reach these producers individually but through “pools,” i.e., aggregating mediators such as microfinance institutions (MFIs) and cooperatives).

iii. Reach 3.8 million agricultural producers by 2020 through pooling mechanisms such as value chains, MFIs, and cooperatives.

iv. Reduce banks’ break-even interest rate to borrowers from 14% to 7.5–10.5%.

Implementation

NIRSAL and its five pillars will be administered by a Non-Banking Financial Institution (NBFI). At the national level, the NBFI will administer the five NIRSAL pillars. It will report to a Board of Directors chaired by the CBN, with memberships from AGRA, the Ministries of Agriculture, Finance, and Commerce and Industry.

The board will have ultimate decision-making and strategy-setting responsibility for the Fund. The CEO of the NBFI will be responsible for NIRSAL’s overall implementation and for maintaining relationships with key stakeholders. At the regional levels, Regional Transformation Engines will administer NIRSAL through Portfolio Investment Managers and Technical Assistance Representatives.

Benefits of the NIRSAL Initiative

The benefits of the NIRSAL initiative are classified according to the stakeholders who will reap them. The benefits are presented below:

1. Central Bank of Nigeria

i. Increased lending to agriculture from 1.4% to 7% of total bank lending within 10 years.

ii. Increased income, GDP, foreign exchange earnings, and implications for the Bank’s ability to manage the value of the local currency.

iii. Lower food inflation and maintain robust external reserves as well as monetary stability.

iv. The project will absolve the Bank of the need for endless and voluminous subsidies to the agricultural sector.

2. Commercial Banks

i. Opportunity to capture latent profits in agricultural lending.

ii. Maintain long-term human, institutional, and cultural capacity for value chain financing.

iii. Enjoy lower loan origination and distribution costs.

3. Agricultural Producers

i. Increased access to credit.

ii. Enhanced adoption of better cultural and agronomic practices.

iii. Use of improved inputs like seeds and fertilizers.

iv. Increased productivity, profit, income, standards of living, and job creation.

v. Poverty reduction.

4. Ministry of Agriculture

i. A stronger agricultural sector with six showcase value chains.

ii. Enhanced food security.

iii. Reduced imports.

iv. Higher productivity.

5. Ministry of Finance

i. A stronger economy with additional agricultural GDP growth.

ii. Higher employment.

iii. Reduced expenditure on food imports.

iv. Higher tax revenue from the agricultural sector.

v. Competitive exports and a more diversified economy.

6. State Governments

i. An improved agricultural economy at the state level, creating more employment.

ii. Poverty reduction.

iii. Enhanced food security.

iv. Higher tax revenue from a better-performing, well-financed sector.

NIRSAL is a new initiative by which the Nigerian government shares agricultural credit risk with farmers by involving all stakeholders in the field of agriculture. NIRSAL does two things at once: it fixes the agricultural value chain so that banks can lend with confidence to the sector, and it encourages banks to lend to the agricultural value chain by offering them strong incentives and technical assistance.

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