Funding Agriculture in Nigeria: The Role of NIRSAL

1. Funding Agriculture in Nigeria: The Role of NIRSAL By NIRSAL PIO (Central Bank of Nigeria) At BusinessDay Agribusiness Conference June 7th, 2012

2. What Is the Current State of Nigeria’s Agricultural Finance? • Today Nigeria’s formal financial system is lending ~2.5% of all formal credit to the agricultural sector • Today’s levels represent progress versus 2 years ago when only about 1% of all credit went to agriculture; note that since 1980s, levels of lending have remained low despite a series of Central Bank interventions e.g. • Agricultural Credit Guarantee Scheme Fund (ACGSF): ₦52 billion guaranteed • Agricultural Credit Support Scheme (ACSS): ₦50 Billion pool • Commercial Agriculture Credit Scheme (CACS): ~ ₦200 Billion in on-lending • As a result of the lessons we have learned running such financing schemes, CBN decided to change how it supports the financing of agriculture; changes included but were not limited to: • Focus more on guarantees rather than placing credit/funds directly with banks • Use mix of incentives and penalties to shape financial system behavior • Address challenges in the value chain by providing extensive technical support, etc • In 2011, CBN launched a new agriculture financing strategy and platform: Nigeria Incentive Based Risk Sharing System for Agricultural Lending (NIRSAL) • A key metric of NIRSAL’s success will be raising formal lending to ~10% by 2017 Source: NIRSAL Analysis

3. What Is NIRSAL? • NIRSAL is a public private initiative designed to appropriately define, price, and share agribusiness related credit risk • NIRSAL is currently a project office inside CBN but in process of securing permissions to register as a public limited corporation • NIRSAL is a public private initiative of the following partners: • Central Bank of Nigeria (CBN) • Bankers Committee (CEOs of deposit money banks, specialized banks, and discount houses) • The Federal Ministry of Agriculture & Rural Development • NIRSAL mobilizes financing for Nigerian agribusiness by using credit guarantees to address the risk of default • NIRSAL is a flexible financing tool designed to change the behavior of financial institutions • Commercial in design and execution including the cost of capital • Covers all crops and livestock activities in Nigeria • Builds on a legacy of previous CBN interventions in agriculture that has helped create thousands of jobs

4. What is NIRSAL’s strategic objective? Agriculture value chain Input producers Farmers Agro Dealers / Storage Agro processors Industrial manu-facturers Distribution and exports Agricultural financing value chain Loan Product Develop. Credit Distribution Loan origination Credit Assessment Managing and pricing for risk Loan Disbursement Enablers • Infrastructure • Credit bureau • Policies • Extension services • Price stability boards 1 Includes working capital loans; fixed asset finance; trade finance

5. What Are the Main Elements of NIRSAL? NIRSAL (₦75 billion assets to stimulate lending by banks and other financial players ) • Insurance • Facility (₦4.5B) • Risk • sharing • Facility (₦45B) Technical assistance facility (₦9B) Agricultural bank rating scheme (₦1.5B) Bank incentive mechanism (₦15B) Goal • Targets incentives that move banks to a long term, strategic position and commitment to agricultural lending • Shares lending risks with banks (e.g. 75% of loss incurred) • Links insurance products to the loan provided by the banks to loan bene-ficiaries • Builds the capacity of banks, micro-finance institutions • Build capacity of agricultural value chains • Expand financial inclusion • Rates banks according to their effective-ness of lending to agriculture. Expand bank lending in agricultural value chains NIRSAL Objective De-risk agriculture finance value chain Build long-term capacity Institutionalise incentives for agriculture lending

6. What Market Does NIRSAL Serve? (1 of 2) • NIRSAL provides credit guarantees to all creditworthy participants across multiple crop, livestock and supporting services values chains • NIRSAL estimates that the addressable market it serves is a revolving N600 – N900 billion market for working and growth capital • For example: Cotton (N36 billion); rice (N70 billion); cassava (N200 billion) • NIRSAL guarantees can be issued for as long as the borrower requires e.g. 10 year guarantees • NIRSAL has no limit on the size of individual guarantees it can issue; the limit is imposed by NIRSAL’s balance sheet which today can guarantee up to N450 billion in loans • NIRSAL’s guarantees can be issued to borrowers (via their credit provider) who are: • Borrowing using a variety of debt instruments e.g. revolving loans, term loans, bond issuances, convertible debt, etc • Borrowing in both local and foreign currencies (via swap arrangements)

7. What Market Does NIRSAL Serve? (2 of 2) • The full scale planning assumption is based on upgrading the production for 160,000 hectares or N9.6 billion in financing for lenders:

8. What Does NIRSAL’s Core Product Offer Actually Look Like? Source: NIRSAL Analysis

9. Working with NIRSAL – The Mechanics • Since April 2012, NIRSAL is open for business and now ready to sell credit guarantees • Any contracts sold today will be as CBN, and then assigned to the future NIRSAL legal entity that is in the process of formation • For the purchase of CRGs, we only interact with our wholesale counterparties, e.g. deposit money banks, discount houses, asset managers and trade finance providers • Financial institution discusses potential lending with a borrower, and agree on terms of a loan package • During this period, the lender can reach out to NIRSAL to seek out clarifications on the specifics of the transaction as well as structuring considerations • Lender submits 2 documents to NIRSAL with CRG application form e.g. Draft Offer Letter and copy of the report submitted to credit committee • NIRSAL has provided a list of what should be available for inspection should we need more due diligence e.g. certificates of registration / bank statements, etc • NIRSAL reviews CRG application and within a maximum of 10 business days reverts with a decision on the CRG and/or IDP • Decision communicated to financial institution • Institutions encouraged under guidelines to securitize loan portfolio and expand liquidity

10. Current “Live “ Transactions (June 2012) • Cassava • Planting for harvest in 18 – 20 months from summer 2012; yield target is 20 – 25 tons/hectare with a cost of N100,000 per hectare • At target of 40 million tons or 2 million hectares, that equals ₦ 200 billion in working capital requirement • Cassava chips export starting in June 2012; training now underway for farmers and chip processors in 3 regional centers around Nigeria; chip exports require ₦ 1.5 billion in financing per cycle • Rice • 2012 planting season financing framework developed based on session in Minna in late April 2012 • Financing expected to cover supply of variety of inputs e.g. fertilizer, micronutrients, seeds and crop protection chemicals • Requirement estimated at ₦9.7 billion for Niger State the largest producer; nationally, value will reach ₦40 – ₦70 billion if fully commercially financed • Cotton • Financing discussion underway with farmer association (NACOTAN) and private cotton company (WACOT)

11. Financing Cotton Example: The NCA Strategic Agenda for Cotton • The 2012 39th meeting of the National Council of Agriculture & Rural Development identified a set of strategic targets for the cotton value chain to be executed in 11 states of the federation: • Katsina, Zamfara, Gombe, Adamawa, Borno, Niger, Kano, Kaduna, Jigawa, Oyo and Ogun • Outlined below are the main targets set by the NCA i.e. raise seed cotton production to 600,000/annum by 2015 • To advance our discussions today, we have estimated some of the potential implications of the NCA’s targets using pro-forma figures • Our focus today therefore is brokering a dialogue regarding how we use the commercial system of financing (and potential state trust funds) to generate about ₦60 billion in financing for cotton production Source: NCA 2012 (Report of Officials), NIRSAL Analysis

12. Financing Cotton Example: How We View Value Chain • The cotton value chain contains a range of participants, a number of whom are in varying degrees of “readiness” to create value. In order for financiers to step in, explicit action will be required to ensure optimal performance of each segment: Financial Institutions credit lines / loans Off-takers (domestic and foreign) Quality Control : New cotton bags; state & federal inspectors; SGS Input Suppliers Farmers Association /Cooperative Ginners Domestic Textile Industry Private extension + ADP NIRSAL credit guarantees Source: Cotton Value Chain Meeting (April 2012), NIRSAL Analysis

13. Financing Cotton Example: Framework 1 • Farmer cooperative organizes its members into clusters of farmers e.g. by senatorial district or local government or ward or any other aggregation that is practical • The exact land holding for each member is known, and given a target yield e.g. 1 to 2 tons/hectare, volume for that ward/LGA/district/state can be forecast • Cooperative also signs large scale input agreement with consortium of input suppliers • Cooperative organizes system of okada and trucks to collect raw cotton from farms, or prompts the farmers to bring their cotton to designated ginneries; system can also be used to deliver inputs early in the season • In parallel, farmer cooperative signs agreement with network of ginneries to gin the cotton • Exact ginning capacity required can be estimated based on average ginning speed per day • Agreement will include financial terms e.g. price / ton or bag ginned i.e. ginneries are paid as a service provider / toll ginner • State inspectors will be present at the site of each ginnery to supervise grading and packaging • In parallel, farmer cooperative signs off-taker agreement with end users of cotton i.e. domestic or foreign buyers • Based on price and volume agreed, cooperative can offer its members a price for their raw cotton that reflects the value of final markets 2 3 Source: NIRSAL Analysis

14. In Conclusion . . . • CBN’s agricultural intervention has led to increased access to finance by farmers and other stakeholders • These initiatives have promoted the growth of the agricultural sector, facilitated employment and income generation in the rural areas • Going forward, as NIRSAL takes its role as CBN’s primary support for agribusiness, we expects its management will continue to refine its scope, offerings and market presence • We have set aggressive targets but are putting in place a process to achieve these • Achieving our credit formation objectives will require significant investment and changes in behavior (especially among deposit money banks) but we are cautiously optimistic based on the progress thus far • Therefore, we welcome further partnership between NIRSAL/CBN and the parties assembled here today