Agriculture is risky, especially in Nigeria, but that is not the only reason banks and other financiers in the private equity and venture capital space find it difficult to fund the sector. Financial institutions, especially banks, are on one hand expressing willingness to lend to agriculture, but on the other (perhaps stronger) hand, are constrained by certain uncertainties.
In recent time, interactions with Head of Agric finance desks, Chief Risk of Officers, and even some Bank CEOs have a few common denominators. These were reinforced last week at an Agric finance conference where experts highlighted the lack of record keeping, and fragmentation issues when smallholder farmers approach banks for finance.
Aggregation of farmers in groups (such as cooperatives and out grower schemes), appears to be attractive to banks, as they are more confident of dealing with farmers in groups. It is also considered more cost-effective than dealing with individual smallholder farmers. In the end, the banks have to make conscious efforts to be profitable with as minimal resources as possible.
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Kudzai Gumunyu, divisional head, Agricultural Business Head Finance, FCMB, in a panel discussion at the Agrifin conference, noted that if “a farmer for instance wants to borrow N200,000. The amount of effort that will be put in as banker, on a N200,000 facility is probably the same as putting effort in a N10million facility. With a farmer borrowing N200,000, the interest I get from that loan, might not even be able to cover the monetary cost of going to look at their project.”
“For smallholders to approach a bank, and borrow in their individual capacity, it is difficult,” said Gumunyu.
Niyi Kumuyi, an Agribusiness finance relationship manager with Guaranty Trust Bank, corroborates this, noting, “As a bank we try to address more of groups. It is easier to monitor them that way. It is easier than granting credit facilities to individuals.”
A solution, which Gumunyi says FCMB has found suitable, is the out grower model. He explained the bank is now financing the value chain in an innovative way where it targets aggregators buying from farmers. These aggregators with finance are able to buy fertilisers in bulk, which is in turn provided to farmers. That also means the farmers have a guaranteed market, because that aggregator is financing them and will off take the produce from them.
Making the decision to lend to any one in agriculture, especially a farmer, has been described a tough call on account of the usual lack of records. Basic book keeping bankers say, will show the history of a farm operation; cash flow, progress, challenges, and making it possible to determine whether a prospective borrower is able to utilize the funds they seek, and more importantly, pay back. Years of experience in practicing agric matter less if well-kept records cannot be shown to justify the competencies being claimed.
“Banks can’t give credit if they don’t see what you’ve been doing. You have to know that these monies are not ours, but for depositors,” said Kumuyi, who also explained that farmers need to develop a culture of bookkeeping as this makes it possible for banks to easily decide on loans, and even offer advisory services.
Goddie Ibru, principal, G.M. Ibru & Co, and the Agrifin conference chairperson, who stated 60 percent of working Nigerians are engaged in agricultural production, noted that yet, as a destination for finance, agriculture is often looked upon as a poor relation to other sectors of the economy.
“This is a critical mistake, because of the central role that food security plays in the safety of our country. The significant returns and stable growth that agriculture provides to investors in other climes, is not being taken advantage of by the Nigerian financial sector, and that makes all of us poorer,” Ibru said.
He further explained, as a country, there has been more of lip service in diversification of the Nigerian economy for too long.
“For too long also, we in the private sector have left initiatives in Agriculture to the government – treating agricultural finance and investments like welfare, or rural development initiatives, instead of as a vital destination for private capital. Our ignoring this sector has come at a cost,” Ibru said.
To achieve a compromise, it appears agribusinesses, especially smallholder farmers will need to harness the strength of group collaborations as a way of giving banks more confidence to lend. Also important is the need to ditch their informal mindsets and giving their business all the seriousness it requires through adequate book keeping.
CALEB OJEWALE
