Agribusiness Access to Finance Nigeria

Agribusiness Access to Finance Nigeria

Financing agribusiness in Nigeria is perceived as difficult, high risk, and insufficient by many. This study aims to provide an objective and comprehensive overview of supply and demand for agricultural finance, current gaps, and potential solutions that have been identified in Nigeria, Africa and the rest of the world. The research was commissioned by the Embassy of the Netherlands to Nigeria and conducted by Agri-Logic.

The aim of the report is to explicitly inspire stakeholders to action in improving access to finance. A thorough understanding of current agricultural access to finance in Nigeria can inform recommended interventions for government and development programs, and opportunities for entrepreneurs as well as providers of financing.

The report distinguishes real risk from perceived risk, while highlighting gaps in supply and demand, and illustrating solutions and best practices. The report aims to understand the status of access to agricultural finance across sectors, the value chain, and states in Nigeria, with a focus on those most relevant to the objectives and most relevant to bilateral relations between the Netherlands and Nigeria.

Sector characteristics

Agriculture and agribusiness are widely recognized as being critical for development. The sector in Nigeria is characterized by:

  • Production of crops, livestock and aquaculture, with staples for domestic processing and consumption; and cash crops for export value.
  • Smallholder farming with many subsistence farmers and often low productivity. Commercial farmers are less than half of the farmer population.
  • A largely informal economy and entrepreneurship: SMEs are significantly contributing to GDP, yet often not registered and with limited scalability.
  • Policy and legislation is often focused on incentivizing domestic production and self-sufficiency, often by trade regulation for import or limiting access to foreign currency.
  • With a growing population, challenges in infrastructure, and trade barriers, the country has high and increasing food prices and self-sufficiency is not yet in sight.

Demand and supply

The total demand for agricultural finance is estimated at ₦83 trillion ($200 billion). Demand for financing roughly falls into three categories: farmers short term finance for inputs, MSME medium to long term finance for assets and overheads, and large and multinational companies short term working capital and long term investment in productive assets.

The total supply of agricultural finance is estimated ₦1.6 trillion ($4 billion), with an additional ₦6 trillion ($15 billion) self-financed by entrepreneurs.

Banks are the largest provider of agricultural finance in Nigeria, even though agriculture only represents ~5% of their total loan portfolio. Bank funds for agriculture grow ~35% annually. Nigerian banks generally have liquidity, but stakeholders have reported collateral requirements, lack of knowledge, currency and market risks, and lack of a rural branch network as challenges.

Public schemes by CBN and others are a significant source of funds for agriculture and agribusiness, and are the largest actor that is facilitating inputs credit to farmers and providing medium term finance to SMEs. These funds however do struggle with low repayment rates and as such have limited scalability.

Value chain finance is disseminated through traders or processors as an aggregator, and while there is a strong business case to build on commercial relationships, aggregators are not always willing and able to scale considering that financial services are not part of their core business capability.

Financing gap

Based on a bottom-up estimation of demand and supply, the financing gap for agricultural finance in Nigeria is ₦76 trillion ($183 billion), roughly 90% of total demand for agricultural finance.

The financing gap is largest for medium term and medium sized debt, revealing a missing middle. However, considering the very large finance gap for all financial instruments and transaction sizes, the missing middle should not be the only focus. While supply of agricultural finance grows with an average 29% annually, compared to a demand growth of 15%, this is insufficient to catch up with the finance gap, which could have doubled by 2027.

Weaknesses of the sector that underly the very large access to finance gap relate to collateral, knowledge and profitability. Stakeholders report corruption, policy and security as specific concerns for Nigeria. In addition, market volatility, weather and supply chain dependencies are risks that are common to agribusiness globally. For entrepreneurs, innovators and investors, sector knowledge, a safety net through savings or insurance, diversification and partnerships are the key elements for risk mitigation.

Way Forward, Returns and Impact

The authors call on all stakeholders to focus on the most scalable and impactful solutions in each segment:

  • Informal community schemes are the most appropriate solution for a large segment of smallholder farmers, and can be scaled through public and private extension services. This can also be a solution for MSME services such as aggregators or inputs dealers on community level.
  • Value chain finance builds on existing commercial structures to reach commercially viable smallholder farmers, and needs alternative collateral solutions, de-risking, and data to become scalable. This could potentially be achieved in partnership with MFBs who leverage fintech.
  • Banks have liquidity, interest and incentive to invest in agribusiness, and combined knowledge and tools for agribusiness and SME investing can support the growth of this segment. Funds as an indirect investment vehicle could also provide a solution for those banks who are not able to build agribusiness expertise.
  • Fintech and agritech can reduce risks and reduce transaction cost through data and targeted solutions. By developing solutions that appeal to asset managers, pension funds, investment clubs and diaspora, fintech offer the opportunity to tap into sources of funding not currently accessible for agribusiness.

These combined interventions can generate an additional supply of finance of ₦30 trillion ($73 billion) by 2030, improve livelihoods for 50 million people, enable production of an additional 125 million MT of food, and contribute ₦35 trillion to GDP. Banks and fintech have the potential to contribute the largest supply of financing to the sector, whereas informal schemes and value chain finance can have the largest impact on livelihoods and food security. While these combined interventions can reduce the finance gap significantly, this is insufficient to close the gap fully.

Addressing the $200 billion demand for finance for Agriculture and Agribusiness in Nigeria – detailed report (Netherlands Embassy)
Addressing the $200 billion demand for finance for Agriculture and Agribusiness in Nigeria – executive summary (Netherlands Embassy)
Addressing the $200 billion demand for finance for Agriculture and Agribusiness in Nigeria – infographic finance demand (Netherlands Embassy)
Addressing the $200 billion demand for finance for Agriculture and Agribusiness in Nigeria – infographic finance supply (Netherlands Embassy)
Value Chain Analyis Specialty Coffee Rwanda

Value Chain Analyis Specialty Coffee Rwanda

CBI (Centre for the Promotion of Imports from developing countries) is part of the Netherlands Enterprise Agency, funded by the Dutch Ministry of Foreign Affairs.

The mission of CBI is to connect small and medium-sized enterprises (SMEs) in developing countries with the European market and so contribute to sustainable and inclusive economic growth. CBI does this by implementing three to five-year projects in a specific export value chain (VC) in a specific country, focusing on seizing opportunities for exports to Europe and tackling obstacles that hamper or hinder these exports. They are integrated projects, meaning they involve both SME exporters and the enabling environment. CBI develops and implements projects in several consecutive phases.

  1. Value Chain Selection (VCS) phase: based on preliminary research, the most promising value chain in the target country is selected
  2. Business Case Idea (BCI) phase: an initial idea for a project is formulated focusing on the selected value chain
  3. Value Chain Analysis (VCA) phase: an in-depth analysis of the VC is conducted
  4. Business Case phase: a detailed business case for a project is developed
  5. Implementation and Performance Management phase: the project is implemented and the success of the project is monitored
  6. Audit and Evaluation phase: after completion, the project is audited and evaluated.

The objective of the Value Chain Analysis study was to provide answers to the following questions.

  • What does the European export market look like? To confirm findings in the earlier phases of project development and to gain a better understanding of the specific markets and segments a project could focus on.
  • What is the composition of the value chain? Includes an analysis of the key actors, chain supporters and influencers.
  • What are the salient corporate social responsibility (CSR) issues?
  • What are the main opportunities for export to Europe and which obstacles prevent export?
  • What interventions and support activities are needed to seize opportunities and tackle obstacles?
  • How and to what extent will these interventions and support activities help seize opportunities and tackle obstacles?
  • Who can take up which interventions and support activities?
  • What the risks are for a project and how can these risks be mitigated?

The Value Chain Analysis was completed in September 2018, and CBI is currently implementing a specialty coffee program in Rwanda.

Value Chain Analysis for the Coffee Sector in Rwanda (CBI)
Coffee export capability Burundi & Rwanda

Coffee export capability Burundi & Rwanda

TWIN in partnership with Trade Mark East Africa (TMEA) implemented a two year project to strengthen export capabilities of twenty coffee cooperatives in Rwanda and Burundi with a specific focus on supporting cooperatives in: attaining certification, increasing access to Specialty Coffee markets, improving quality of the coffee produced and developing a traceability programme for coffee grown by women.

This export capabilities study identifies actors, value addition, financial analysis, market demands and the enabling environment. We have assessed the export capability of each of twenty coffee cooperatives on a range of indicators, leading to a segmentation. Furthermore, we identified general trends in export opportunities and challenges for both origins.

Even though Burundi has very high quality coffee according to buyers, there are still a lot of basics that need to be covered to be able to market the coffee successfully. Major challenges still exist in logistics, speed, traceability, reliability of pre-shipment samples, communication and marketing.

Rwanda is seen as well-organised and it is a coffee of good quality, there are certain constraints put forward by the buyers with regards to the marketing of the coffee. Flavour is not as unique and other differentiation is needed to compete in the specialty segment. Cooperatives are not always able to provide reliable pre-shipment samples and have limited knowledge of the market and pricing.

Coffee export capability assessment Burundi & Rwanda (TWIN-TMEA)
African Coffee Investment Review

African Coffee Investment Review

Via its Global Coffee Platform (GCP), the IDH Sustainable Trade Initiative seeks to make a significant impact on the global coffee sector. Africa features heavily in it’s strategy as an under-utilized source of significant new coffee volumes to meet growing demand. Ironically, much of the coffee and sustainability investments over the past 10-15 years have taken place in Latin America and Asia. Africa has just 4% of global certified sustainable supply (against around 10% of total supply), yet the needs for investment in coffee on the continent are arguably greater than elsewhere.

Agri-Logic was asked to conduct in-depth coffee sector studies for 9 African origins: Angola, Burundi, Cameroon, Ethiopia, Ivory Coast, Kenya, Rwanda, Tanzania and Uganda. These studies are used to develop the GCP’s African investment strategy, and feed into the establishment of an African Coffee Facility by the African Development Bank (AfDB) and the Inter-African Coffee Association (IACO). Investment opportunities in each origin are investigated, including modelling of their impact and return on investment at different levels of the value chain.

We developed a dynamic sector model allowing to analyze large volumes of data from different sources. This model is fed by a structured database and allows insight into a sector’s performance compared to user-defined global benchmark origins. The study has been presented at the Africa Coffee Facility inception meeting in Abidjan to a public of regional coffee sector representatives and staff of IACO and the AfDB, as well as during the Global Coffee Platform workshop in Addis Ababa.

African coffee sector investment opportunities – summary (GCP)
African coffee sector investment opportunities – country report Angola (GCP)
African coffee sector investment opportunities – country report Burundi (GCP)
African coffee sector investment opportunities – country report Cameroon (GCP)
African coffee sector investment opportunities – country report Cote d’Ivoire (GCP)
African coffee sector investment opportunities – country report Ethiopia (GCP)
African coffee sector investment opportunities – country report Kenya (GCP)
African coffee sector investment opportunities – country report Rwanda (GCP)
African coffee sector investment opportunities – country report Tanzania (GCP)
African coffee sector investment opportunities – country report Uganda (GCP)