By

Uzoma F. Onuoha

Head, Agric. Credit Support Division

DEVELOPMENT FINANCE DEPARTMENT

CENTRAL BANK OF NIGERIA ABUJA

A Paper Delivered at the African Rural and Agricultural Credit Association

(AFRACA) International Conference on Revolutionizing Finance for Agriculture,

Nairobi, Kenya (July 14th -18th , 2014)

Credit Guarantee Schemes:

Experiences and Lessons from

Nigeria

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OULTLINE

1

• Introduction

• Financial Risks in Agricultural Lending

• Consequences of Bank’s perceived Risk in Agriculture

• What are Credit Guarantee Schemes

• Categories of CGSs

• Credit Guarantee Schemes of the Central Bank of Nigeria o Agricultural Credit Guarantee Scheme Fund (ACGSF) o Nigeria Incentive-Based Risk Sharing System for Agricultural Lending

(NIRSAL) o The Small and Medium Enterprises Credit Guarantee Scheme (SMECGS)

• Other Institutions involved in Credit Guarantee in Nigeria

• Challenges of CGSs in Nigeria

• Way Forward

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1 2

INTRODUCTION: NIGERIA AT A GLANCE

Sources:

Central Bank of Nigeria

National Bereau of Statistics

EfinA

Population 168.3 million

GDP Growth Rate 7.41%

Inflation Rate 8%

Nominal GDP $509,970.14

GDP Per Capita $2,921.45

Financial Exclusion rate 39.7%

Life Expectancy at birth 47.6 years

Incidence of Poverty 72.6%

Unemployment Rate 25.7%

Agriculture 21.40%

Industry 26.37%

Services 52.23%

SECTORAL CONTRIBUTIONS TO GDP

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Agriculture represents an important part of Nigeria’s economy,

accounting for 60% of employment and 21.4% of GDP …

SOURCE: FAO Stat; CBN; Press research; team analysis

4258

99

Agriculture

Other

Exports2

1

GDP

21.4.

Employment

60

1 Working population

2 Trillion

3 Productivity measured as output per worker. Productivity in Nigeria in 2007 was US$1,500 for agriculture, compared to US$2,600 for other sectors.

AGRICULTURE IN NIGERIA

Share of agriculture in production, employment and exports, 2013

Percent

100% = 98 m1 N 24.3 tr2 N 3.2 tr2

5

95

40

78.6

Nigeria has the capacity to unleash its agricultural potential not only in the context of meeting domestic staple food needs but in unleashing its food export potential.

This potential however,

cannot be achieved if

the primary bottleneck

of restricted access to

finance is not

addressed with urgency.

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BANK CREDIT TO AGRIC SECTOR IN YEAR 2012

Even though the agricultural sector contributes significant proportion of

the GDP, bank credit to the sector was only 3.9 per cent at end-2012.

Less Preferred Sectors; 38,2

Others; 22,3

Agriculture; 3,9

Solid Minerals; 21,7

Exports; 0,8

Manufacturing; 13,1

Priority Sectors, 39.5

BANK CREDIT TO AGRICULTURE IN NIGERIA

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FINANCIAL RISK IN AGRICULTURAL LENDING

Financial risk is a broad term that refers to the types of risks associated with financing

and financial transactions e.g. loans have the risk of default. This is one of the major

reasons why banks do not lend to Agriculture in Nigeria.

Some Forms of Financial Risks

Credit risk (also called default risk), is the risk associated with a borrower going into default (not making payments as promised). Asset-backed risk : Risk that the changes in one or more assets that support an asset-backed security will significantly impact the value of the supported security. Liquidity risk: This is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit). Market risk e.g Equity risk, Interest rate risk, currency risk, commodity risk.

A survey by the World Bank revealed that about 52 percent of firm managers in Nigeria indicated that access to finance was a serious constraint and 46 percent of the same group indicated that cost of financing was the next constraint.

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RISK FACTORS AFFECTING BANKS’ FINANCING OF AGRICULTURE

• PERCEPTION

-High perceived risk -Lack of understanding of the agric. sector -High default rates from government-

driven lending programs. -Do not perceive agriculture as a business -Are unable to access and price the risk

elements and so want the sector de-risked to make it more attractive for financing

• COVARIANT RISKS

-Incremental weather, pests and diseases, price volatility, farming systems and the differentiation of farmers

• OTHER CHALLENGES

-Agriculture suffers information asymmetry;

-Lacks the required technology and

infrastructure.

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7

CONSEQUENCES OF BANK’S PERCIEVED RISK IN AGRICULTURE

i. Missed opportunities – Many promising projects fail to see the light of the day because of banks failure to lend.

i. Significant cost overruns – Excess cost above original estimates as a result of expenses due to risk assessments.

ii. Scheduled delays – Risk assessment increases the cycle time for processing agric. Loans.

iv. Cancellations/licence withdrawals – under regulated banking

regimes non- compliant banks may suffer indictments

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8

CONSEQUENCES OF BANK’S PERCIEVED RISK IN AGRICULTURE CONT’D

v. Fines and penalties – As a result of sharp practices erring banks face fines and penalties.

vi. Loss of credibility – As a result of iv. And v. credibility issues arise for indicted lending institutions.

vii. Loss of output/market share – farmers produce below

optimum while banks suffer reduced market share that would have

accrued from agric. Financing.

viii. Reduction or total loss of income – When there is reduced

or no production there will be reduced or lost income from agriculture.

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Credit guarantee is a form of insurance that helps to protect the interests of a seller from the chance of non- payment by a buyer. CGSs therefore provide guarantees to groups that do not have access to credit by covering a share of the default risk of the loan. In case of default, the lender recovers the value of the guarantee.

Credit guarantee schemes provide guarantees to individuals or groups that do

not have access to credit by covering a share of the default risk of the loan. In

case of default, the lender recovers the value of the guarantee.

CGSs are thus designed to diminish the risk associated with lending to SMEs

as they can reduce information asymmetry and alleviate high collateral

requirements.

WHAT ARE CREDIT GUARANTEE SCHEMES (CGSs)

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BENEFITS OF CREDIT GUARANTEE SCHEMES

i. Reduction of the overall risk in an economy

ii. Mitigating against inefficient distribution of wealth

iii. The interest of banks to finance SMEs can be increased by the use of guarantee mechanisms.

iv. Financial sustainability - It is possible for credit guarantee schemes to stand on their own, without outside assistance.

v. Credit additionality i.e. the extra loans that would not have come about without the credit guarantee scheme

vi. Economic additionality and spillover effects i.e. the opportunity to contribute not only to credit additionality, but also to technology and knowledge spillover and economic additionality, e.g. increases in profit and/or employment.

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CREDIT GUARANTEE SCHEMES IN OTHER CLIMES (STYLIZED FACTS)

a. Canadian Small Business Financing Program (CSBF)

• Type of Guarantee – MSMEs (Private)

• Guarantee Coverage – 85%

• Maximum Limit - $500,000.00

• Guarantee fee – 2% of loan

b. The Small Business Development Fund (SBDF) of Slovenia

• Type of Guarantee – MSMEs (Public)

• Guarantee Coverage – 60 to 80%

• Maximum Limit - $60,000.00

a. Portugal Mutual Counter-Guarantee Fund

• Type of Guarantee – MSMEs (Private)

• Guarantee Coverage – 80%

• Guarantee fee – 2% of loan up to €150,000 and 1.5% for larger transactions.

a. Chilean Guarantee Fund for Small Businesses

• Type of Guarantee – MSMEs (Public)

• Guarantee Coverage – 80% for loans below $90,000.00 and 50% for loans above $90,000.00

• Guarantee fee – 2% of loan depending on borrowers default history.

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BASIS FOR CENTRAL BANK OF NIGERIA’S AGRICULTURE FINANCING INTERVENTION PROGRAMMES AND SCHEMES

These endeavors are expected to facilitate the emergence of a strong and self-sustaining agricultural economy in which private sector would ultimately be the leading engine of growth.

In view of the risks associated with the agricultural sector and banks reluctance to finance the sector, the Central Bank of Nigeria has been involved in the design and implementation of guarantee schemes and programmes aimed at addressing the problem of limited access to credit by large, medium and small-scale producers..

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CREDIT GUARANTEE SCHEMES OF THE CENTRAL

BANK OF NIGERIA (CBN)

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Central Bank of

Nigeria

Credit Guarantee

Schemes

Nigerian Incentive Based

Risk Sharing System

for Agricultural Lending

NIRSAL (2010)

N200 billion Small and

Medium Enterprises

Credit Guarantee

Scheme (2010)

Interest Drawback

Programme - IDP

Agricultural Credit

Guarantee Scheme

Fund

ACGSF (1978)

Trust Fund

Model - TFM

SME

Finance

Agric.

Finance

The Central Bank of Nigeria operates a direct retail credit

guarantee scheme system geared towards agriculture and MSMEs

Self-Help Groups Linkage

- SHG

Agricultural Credit Guarantee Scheme (ACGS)

Objectives

Provides guarantee of 75% for loans

granted for agricultural purposes

Encourages commercial banks to

increase lending to the sector

Stimulates increase in productivity

across the agriculture value chain

Funding Structure Establishment

The Agricultural Credit Guarantee Scheme

Fund (ACGSF) was established by Decree

No. 20 of 1977, and became operational in

April 1978.

CBN 40%

FGN 60%

CBN – Central Bank of Nigeria FGN – Federal Government of Nigeria

Why the ACGSF ?

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Agricultural Credit Guarantee Scheme (ACGS) Cont’d

Activities

ACGS Fund provides credit guarantee

on facilities extended to famers by

banks up to 75 per cent of the amount

in default net of any security realized.

Activities covered under the Scheme

are crop and livestock production,

processing and marketing.

Others are establishment or

management of plantation for the

production of rubber, oil palm, cocoa,

coffee, tea and similar crops.

N71.471billion disbursed to 859,541

farm enterprises

Modalities

Managing Agent

The Fund is managed by the Central

Bank of Nigeria which is responsible

for its day-to-day operations.

Max Loan Limit = N10m

adjusted in June 2014 to N50m

The ACGS Framework

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Innovations under the ACGS

Self Help Linkage Banking Programme

The Self-Help Group Banking Linkage Programme (SHGBLP) was launched

in 1991 and became operational in 1992.

Establishment

Objectives

The aim of the Self-Help Group Linkage

Banking is to:

Provide alternative form of guarantee to

commercial banks through use of

resources pooled together by farmer

groups

Inculcate banking habits in farmers

Mobilize farmers to build up resources

for financing their farm projects without

recourse to bank borrowing on the long

run.

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Innovations under the ACGS Cont’d

Trust Fund Model (TFM) Cont’d

The Trust Fund Model (TFM) was introduced in

2001

Reduction of the risk exposure of banks in

agricultural lending to uncollateralized farmers

under the ACGS.

Reinforce the confidence of banks in granting

credit facilities to farmers

Under TFM, oil companies, State/Local

Governments and Non Governmental

Organizations (NGOs) place funds in trust with

lending banks to augment the small group-

savings of the farmers as security for

agricultural loans

The Trust Fund secures 25% or more of the

intended loans of the prospective borrowers;

The farmers’ savings secure another 25% of

the loan while;

the ACGSF guarantees 75% of the remaining

50%, thereby leaving the lending bank with a

risk exposure of only 12.5%.

51 MOUs signed valued N5.516 billion

25% Cash Deposit by

Farmers as Security

25% Cash Deposit

from Counter parties

as Security

75% Guarantee from

ACGS

Credit Risk is

reduced to 12.5%

for Lending banks

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Innovations under the ACGS Cont’d

Interest Drawback Programme (IDP)

Introduced in 2003 for loans under the and

has a capital base of N2.0 billion

subscribed to by the Federal Government

(60%) and Central Bank of Nigeria (40%).

The IDP is managed by the CBN and under

the ACGS Board

Establishment

Objectives

Provide interest rebate to farmers that

fully paid their loans on schedule.

Reduce the cost of borrowing and burden

of high interest rates to farmers.

To encourage timely repayment and

reduce the contingent liability on the

ACGS Fund

CBN 40%

FGN 60%

Funding Structure

CBN – Central Bank of Nigeria FGN – Federal Government of Nigeria

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Innovations under the ACGS Cont’d

Interest Drawback Programme (IDP)

Under the IDP, farmers borrow from lending banks at

market-determined rates

Provide interest rebate of 40% to farmers that fully repaid

loans on schedule to reduce the cost of borrowing.

Modalities

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Interest rebate of 40%, valued N2.05 billion ($13.163million) paid to 240,665 claims as at end-April 2014.

Loans Guaranteed Under the ACGS

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881,892

881,892

856,731

208,495

As at end-April 2014 Granted N74.93 billion ($481.153 million) to 881,892 beneficiaries since inception.

Repayments and Settled Claims under the ACGSF

N74.93 Billion N51.45

Billion

0

10

20

30

40

50

60

70

Releases Repayments

Releases , 881,892

Beneficiaries

Repayments, 664,559

Beneficiaries

Repayments and Claims

settlement

Cumulatively, repayment under ACGS stood at 664,559 valued N51.45 billion ($330.37 million) from inception to end April 2014. The Scheme has recorded a

repayment rate of 68.66%*.

On the other hand, the cumulative number of settled claims from inception to date is 14,682 claims valued N546.94 million ($3.512 million).

Note: $1 = N155.73

The ACGSF has recorded a repayment rate of 68.66%.

The rather low repayment rate (68.66%) is because many loans are still ongoing and yet to be liquidated

ACGS SUSTAINABILITY FRAMEWORK

To ensure the sustainability of the ACGS Fund

and further strengthen its ability to meet its

contingent liability

The ACGS Fund is invested in Nigerian

Treasury Bills

The IDP also reduces the quantum of claims

payments by encouraging farmers to repay

on time through rebates.

N100.0m

1978

N6.167b

2014

N3.0b

2001

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ACGS Impact Scenarios

ACGS Impact Scenario, Cont’d

Loan Size & Limit

The demand for loan size of <N5,000 has continually decreased from 20,848 loans in the year 1990 to only 27 loans in 2013 while the demand for loan size >N100,000 increased from just 15 loans in the year 1990 to 20,315 loans in the year 2013. Loans below N100,000 make up 63.90% of the total guarantees demanded

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SWOT ANALYSIS OF THE ACGSF

Strengths

• ACGSF has a good risk formula (75%/25%).

• The Fund has never refused to pay a claim.

• The DMBs have a representative on ACGSF’s Board which deepens confidence.

• Initiatives such as the IDP have decreased the rate of default by borrowers.

Weaknesses

• The delays in settling claims.

• Inadequate scrutiny of loan applications by banks led to massive default rates

• Lack of MIS given the large volumes of loans.

Opportunities

• In Nigeria, there is a large market for credit among small-scale farmers.

• Favorable policies in place towards financial inclusion and real sector financing.

Threats

• The non-autonomous nature of the ACGSF board, which is subject to the influence of the national government.

• Two banks (Union Bank of Nigeria and First Bank of Nigeria) are the major players in the Scheme. If one of these banks opts out, consequences would be dire for agricultural productivity and food security.

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NIGERIA INCENTIVE-BASED RISK SHARING SYSTEM FOR AGRICULTURAL LENDING (NIRSAL): A VALUE CHAINS APPROACH TO CREDIT GUARANTEE UNDER THE

NIRSAL is an initiative aimed at;

•Providing farmers with affordable

financial products

•Reducing the risk to loans

The Central Bank of Nigeria (CBN)

on August 9, 2010 signed an

Agreement with the Alliance for a

Green Revolution in Africa (AGRA)

to develop this new mechanism for

unlocking the access of farmers,

agro-processors, agribusinesses

and input suppliers to financing in

the agricultural value chain.

OBJECTIVES OF NIRSAL

•Spark agricultural industrialization

process through increased

production and processing across

the value chain.

•Build capacities of Nigerian banks

to lend to agriculture,

•Deploy risk sharing instruments

that will lower the risks of lending,

•Provide technical assistance for

farmers and banks

•Develop a bank rating scheme that

will incentivize and

showcase/situate banks based on

their capacities to lend to the

agricultural sector.

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NIRSAL is pivoted on five pillars to be addressed by an estimated USD 500

million of CBN money that will be invested to address the various aspects of

the pillar as follows:

•Risk-sharing Facility (USD 300 million).

•Insurance Facility (USD 30 million).

•Technical Assistance Facility (USD 60 million

•Holistic Bank Rating Mechanism (USD 10 million).

•Bank Incentives Mechanism (USD 100 million).

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NIRSAL CONT’D

NIRSAL Mechanics

• A guarantee fee of 1% per annum on outstanding balance of amount guaranteed.

• Loans benefiting from existing CBN schemes/interventions e. g. ACGSF, ACSS AND CACS are not eligible for interest drawback.

• NIRSAL shares risk with Banks and other Counterparties on predetermined rates of the face value on loans: primary production & mechanization - 75%, large scale & processing – (50%), logistics (20%).

• Each risk guaranteed loan is qualified in principle for consideration for interest drawback paid on quarterly basis. Small holder farmers and cooperatives (40%), Large scale farmers and Agro input dealers (20%).

Risk Sharing occurs in the form of selling a Credit Risk Guarantee . . .

Potential lenders include traditional banks, microfinance institutions, trade finance providers, asset managers, and private equity funds

Credit instrument could be a loan portfolio, a loan, a bond or in some cases, a specific commitment letter

Identified Lender /

Issuer

/Counterparty

NIRSAL Credit Risk

Guarantee

Identified

Borrower

Potential borrowers include farmer groups (cooperatives), large corporate farmers, processing companies, agric service providers, logistics companies, wholesale distributors etc

Whole agribusiness value chain covered across all crops and livestock activities

Loan principal

Loan principal and

Interest payments

Interest Rebates

Small scale - 40%

Large Scale - 20%

Agro dealer - 20%

Guarantee

Fee (1%)

Credit Risk

Guarantee

(Face Value)

Production - 75%

Processing - 50%

Logistics - 20%

NIRSAL Mechanics, Cont’d

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NIRSAL AS AN AUTONOMOUS ENTITY

• Approval has been granted for NIRSAL to operate as an independent entity.

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Achievements of NIRSAL

From Inception to April 2014

• Forty (45) CRGs Covers valued N16.272 billion ($104.48 million) were issued to beneficiaries.

• Seventy three (73) IDPs valued N139.990 million ($898,927.63), as at April 2014.

Note:

$1 = N155.73

The Small and Medium Enterprises Credit Guarantee

Scheme (SMECGS)

Stimulate and sustain private sector investment in

the power and airline sectors as well as fast track

the development of both sectors of the economy

To fast-track the development of the manufacturing SME

sector of the Nigerian economy by providing guarantee for

credit from banks to SMEs and manufacturers Purpose

Provide guarantee cover of 80% of principal and interest

on term Loans to SMEs for

refurbishment/equipment/upgrade/expansion,

overdrafts, etc.

Modality

The raised N200 billion ($1,284 billion) as contingent

liability to provide 80% guarantee cover to banks for SME

loans

Funding

Note: $1 = N155.73

The Small and Medium Enterprises Credit

Guarantee Scheme (SMECGS), Cont’d

20%

72 SME Projects

CBN Assumes 80%

risk on SME loans by

providing Guarantees

to Banks

Via a contingent

liability fund of N200

billion 80%

Ba

nk

L

oa

ns to

SM

E

Banks take only 20%

risk on SME loans

N3.216 billion

($20.65 million)

Performance

As of April 2014

REPAYMENT

The sum of N1.558 billion ($10.004 million) has been

repaid by 23 SME projects.

Note: $1 = N155.73

The Nigerian Export-Import Bank (NEXIM)

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OTHER INSTITUTIONS INVLOVED IN CREDIT GUARANTEE

IN NIGERIA

Note:

$1 = N155.73

Types of Guarantees Issued by NEXIM

PRE-SHIPMENT GUARANTEE: This is a guarantee of credits/advances granted by NEXIM for the purpose of manufacturing, purchasing, processing and/or packaging of goods to be exported under a confirmed export order. It covers 75% of loans and advances.

POST-SHIPMENT GUARANTEE: This is a guarantee of credits/advances granted by a bank in Nigeria against an export bill or any other receivables. It covers 85% of loans and advances.

ADVANCE PAYMENT GUARANTEE: This is designed to protect foreign buyers against payment risks in respect of money advanced to exporters in Nigeria to finance an export order. It covers 100% of loans and advances.

This is an independent DFI Established in 1991 as an Export Credit Agency (ECA).

NEXIM has since its inception disbursed over N13.651

billion ($87.65 million) as loans and advances.

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1 34

BANK CREDIT TO AGRIC SECTOR 2009 - 2012

1,4 1,4

1,7

3,5

3,9

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

2008 2009 2010 2011 2012

Following CBNs interventions in recent years, commercial

bank’s credit to agriculture has increased from 1.4% in 2008 to 3.9% in 2012

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CHALLENGES OF CREDIT GUARANTEE SCHEMES, CONT’D

Demand Side Challenges

• Limited managerial capability due to inexperience, illiteracy and absence of mentoring and entrepreneurial network.

• Lack of collateral for small rural borrowers

• Lack of good business plan to convince banks to lend.

• Inability to afford insurance coverage by poor rural people.

• Repayment problems due to erroneous belief that CGS is a national cake.

Supply Side/ Instituional

Challenges

• High collateral requirement, interest rate and stringent eligibility criteria for benefiting under CGS at bank level.

• Banks’ risk averse behavior

• High interest rate charged by financial institutions.

• Financial institutions’ lack of capacity to develop suitable CGS products to meet the needs of clients.

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CHALLENGES OF CREDIT GUARANTEE SCHEMES, CONT’D

Policy/Institutional Challenges

• Paucity of rigorous data on the demand for financial services especially in rural areas due to information asymmetry.

• Political instability and social insecurity have hindered penetration of CGS particularly agriculture.

• Agricultural Finance not viewed as a strategic business but development programme by policy makers.

G

OV

ER

NM

EN

T P

OL

IC

IE

S

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WAY FORWARD FOR CREDIT GUARANTEE SCHEMES IN NIGERIA

• The micro finance sector should be a priority sector for deepening guarantee schemes especially in rural areas.

• Government should inject more money to beef up the ACGSF capital base and also utilize specialized banks in credit guarantee purveyance.

• Deployment of a fixed/movable collateral for beneficiaries who have access to the formal lending institutions (CBN in collaboration with African Finance Corporation has commenced efforts towards establishment of a movable collaretary registry in Nigeria..

• Agriculture must be viewed as a strategic business by policy makers, financial Institutions and practitioners.

• Central banks should ensure consistency, transparency and clarity of respective legal and regulatory framework over all guarantee schemes.

• Provision of technical assistance to banks and entrepreneurs.

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• Involving donors, the public sector and the private sector to serve as sponsors under Trust Fund Models of guarantee schemes.

• There is need for appropriate designs of CGS in order to ensure financial sustainability, taking into account on the one hand the need to limit default rates and cover the operating costs.

• CGSs to be used as effective instruments to reduce the information gap that exists between lenders and borrowers, especially in the case of agriculture.

• There is need for more in-depth evaluation, particularly on CGSs financial sustainability and on their financial and economic additionality.

• Deployment of a rating system for financial institutions participating in CGS with the objective of rewarding and motivating them appropriately.

WAY FORWARD FOR CREDIT GUARANTEE SCHEMES IN NIGERIA, CONT’D

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The CBN has been involved in the design and implementation of various Credit Guarantee schemes and programmes with the aim of addressing the challenge of low access to credit by large, medium and small-scale producers. This is due to the risks associated with the agricultural sector and banks reluctance to the sector. These initiatives include ACGSF, SMECGS and NIRSAL. They are endeavors geared towards enabling the emergence of a strong and self-sustaining agricultural economy in which private sector would power the engine of growth. It is evident that a lot has been achieved, but more can still be done and CBN is poised towards that. The launching of the Financial Inclusion Strategy in 2012 and the MSMEDF in 2013 are additional efforts towards facilitating credit flow to agriculture and the real sector in general. In the coming years, the Bank will continue to maintain its poise low/affordable interest rates for agricultural loans as well as pursuing effective functioning of various other initiatives to ensure effectiveness, efficiency, synergy and complementarities in areas that are within its mandate.

CONCLUSION

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