Unlocking Agricultural Financing through Insurance

Nigeria’s agricultural practice will attract the needed financing by the time farmers embrace insurance of their activities, which will hedge lenders against perceived risks. This was the submission of participants at a training workshop on innovative agricultural insurance products in Lagos a fortnight ago, reports Festus Akanbi

At a period when the slump in the global oil market is seriously eroding the nation’s revenue base, it is not a surprise that attention of both policy makers and private sector operators are being focused on the development of the non-oil sector of the economy as a better alternative to dependence on oil proceeds.

Apart from the services sector, which has continued to generate employment opportunities and staggering amount of returns to the federal government in forms of taxes and levies, agriculture is the next bus stop with greater capacity to provide employment, and ensure self sufficiency of food as well as generate foreign exchange through export of agricultural produce.

Unfortunately, agricultural practice in Nigeria is yet to reach its optimal level due to lack of adequate financing, a development that makes Nigeria a net importer of agricultural produce with import above N630 billion annually.

The country imports food products such as wheat, rice, flour, fish, tomato paste, textile and sugar in large quantities annually.

This negative development was highlighted by the governor of the Central Bank, Mr. Godwin Emefiele, in a keynote address presented at a training workshop on innovative agricultural insurance products held in Lagos yesterday. The forum was to activate the insurance pillar of the Nigeria Incentive-based Risk Sharing System for Agricultural Lending (NIRSAL).

Emefiele, underscored the severity of the state of the economy saying Nigeria is currently confronted with a wide range of development challenges, especially with the dwindling global crude oil prices and the nation’s dependence on it as its major source of revenue. To this end, he stressed the need to diversify the mono-cultural tendencies of the Nigerian economy by developing other sectors of the economy, especially agriculture.

The same point was stressed at the presentation of the report of the CBN’s Monetary Policy Committee meeting last week when he warned that unless agriculture and manufacturing sectors are rescued, the nation may go into recession next year.

He recalled that before the oil boom, the Nigerian economy was mainly sustained by agriculture.  In the 1960s the agricultural sector contributed up to 60 per cent of the total Gross Domestic Product (GDP) and was the most important in terms of contribution to domestic production, employment and foreign exchange earnings.

The country was then known to be exporters of cocoa beans, gum Arabic, groundnuts, cotton, palm oil and many other agricultural commodities.

Securing Bank’s Support

Providing insight into why Nigerian farmers have not really secured the confidence of banks, observers blamed lack of insurance for farmers’ activities for the regime of poor funding for agriculture.

It is believed that banks are ready to commit their resources into agriculture provided there are adequate measures to insulate their investment, considering the fact that investment in agricultural sector is a long term-one.

According to Managing Director, NIRSAL, Mr. Edwin Nzelu, “But now, we import most of the agricultural commodities that we can produce because of the neglect of the sector in addition to rural migration to cities in search of white collar jobs.  The agricultural sector provides up to 70 per cent of employment in Nigeria and accounts for about 42 per cent of the country’s GDP.

“In Nigeria today, rural farmers contribute about 70 per cent of the food produced which they do mainly by subsistence farming. These farmers with their small land holdings of one to three hectares are producing sub-optimally due to lack of adequate inputs, insufficient exposure to good agronomic practices and limited access to finance and credit.”

Low Appetite for Agriculture Insurance

He explained that it was because of the subsistent level of farming that farmers do not see the importance of insuring their farming activities.

Currently, Nigeria’s formal financial system is lending about four per cent of all formal credit to the agricultural sector compared to three years ago when only about one per cent of all credit went to agriculture. Lending is still low because of the lingering perception by banks that agriculture is highly risky,” the governor who was represented at the workshop by the acting Managing Director, NIRSAL, Mr. Edwin Nzelu, said.

According to him, the development and expansion of the agricultural insurance sub-sector would go a long way in mitigating against natural disasters and eventually encouraging banks to lend to agriculture.

He added that agricultural insurance had been proven to be instrumental in transferring risks and stabilising farmers’ income, noting that in Nigeria, it remains one of the less developed line of business.

“Therefore, there is need for insurance companies in collaboration with relevant stakeholders to develop innovative products that will carter for the needs of farmers in their provision of agricultural insurance.

“Over the years, only the Nigeria Agricultural Insurance Corporation (NAIC) was licensed to underwrite agriculture insurance in the country, until two years ago when NAICOM liberalised the insurance subsector for conventional insurers to underwrite.

“I urge private insurance companies to take advantage of this opportunity and consider extending insurance cover to the agricultural sector to create a competitive market which will eventually increase insurance penetration to rural areas,” he said.

With the collaboration of the apex bank, NIRSAL is said to have spent N54 billion to support agricultural value chain in the past four years.

NIRSAL Director, Alhaji Aliyu Hameed, who gave the figure at a recent forum, disclosed that N54 billion has been spent to support the agricultural value chain in the past four years.

Hameed said NIRSAL has been able to convince commercial banks to lend the required amount of money with its guarantees to different segment in the agriculture value chain.

”We were able to convince commercial banks to lend that amount of money with our guaranties to different segment in the agriculture value chain being the need organisation established by the Central Bank of Nigeria (CBN) to help facilitate commercial lending from commercial banks to agricultural producers, agro dealers, processors, whole sellers and all other actors along the agricultural value chain to ensure that if they have projects or concepts that are commercially viable, finance and capital will not be an issue for them”, he said.

He added that “if farmers are able to bring together a project in agricultural value chain that makes commercial sense and the bank can finance it, the role of NIRSAL is to ensure that we provide credit risk guarantee to the commercial banks so that they can lend comfortably and securely to that project in the agricultural value chain.”

He explained that “NIRSAL certificate of guarantee is as good as issuing a CBN certificate guarantee, so the banks feel very comfortable to hold our certificate of guarantee and then give that loan, but the guarantee levels vary from 75, 50 and 30 per cent guarantee”.

He noted that commercial banks are risk averse when it comes to lending money for agriculture purpose, adding that by virtue of the CBN supporting such financing through NIRSAL, the banks feel very comfortable to lend to all actors in the agricultural value chain.

He said NIRSAL had an incentive for borrowers who did not default in payment called interest rate, saying, NIRSAL gives such borrowers up to 40 per cent interest support, adding that the whole purpose is to encourage farmers to borrow and pay back their loans.

“In the course of achieving food security, you also achieve a lot of other security benefits, so by getting people involved, getting people financed in agriculture, in agro dealership, in production, in processing and in marketing, you will see that a lot of unemployed youths that we have will have a segment in which he or she can play.”

According to him, the key thing to understand is that in agriculture production and value chain, there are factors that are required including land resource, human resource and capital.

Also speaking at the occasion, the representative of the CBN and Kaduna Branch Controller, Alhaji Suleiman Abdulsalam, noted that NIRSAL was established  by the CBN to enable farmers access all the facilities the bank has on ground.

“We have been so oil dependent, so we are moving away from oil to agriculture that has been our traditional source of power, so the tendencies for us to develop is there,” he said.

He disclosed that the CBN was measuring down some of the conditionalities that guide access to loans, adding that such conditions were being reviewed from time to time to enable farmers access such loans, since the CBN does not give money to individuals.

Culled from: http://www.thisdaylive.com