108

An Innovative Way To Improve Agricultural MSME Access To Finance In Nigeria

I. Y. Ilu
National Agricultural Extension and Research Liaison Services
Ahmadu Bello University, Zaria

Nigerian Journal of Agricultural Extension Special Edition, Vol. 21, Number 3, September 2020

ABSTRACT

Poverty, with its consequential derivatives, remains a challenge to Nigeria's economic development.
Nigeria is currently among the poorest countries in the world. About 60 million Nigerians are without a
bank account. Nigeria aimed at achieving financial access to 95 percent of adults by 2024. Since
majority of the unbanked adults in Nigeria are farmers, this paper proposes the use the agricultural
transformation strategy, which employs the value chain approach, to reach more farmers. The value
chain development approach consists of value chain analysis and development, that builds the
capacities of the value chain stakeholders to absorb financial services. This is followed by the
Agricultural value chain financing, an innovative way of channeling financial services to the
agricultural value chains. Finally, the de-risking mechanism is put in place to strengthen, consolidate,
and sustain the confidence of financial service providers to continue serving the agricultural sector. It
is recommended that the capacities of Financial Institutions, Value chain actors, Farmers and farmer
organizations should be built to operate the approach. The capability of the economy to continue
providing the needed services should also be built by carefully monitoring Innovative Instruments and
Delivery Mechanisms, building consistent and Reliable Data base and strengthening the Financial
Infrastructure.
Introduction 2018).
Poverty, with its consequential derivatives; The poor are deprived of many things, one of
insurgency, kidnapping, Cattle rustling and youth which is access to financial services. Nigeria has
restiveness, remains a challenge to Nigeria's the fifth largest number of people on earth,
economic development since the early 1980s. It without a bank account. China with 225 million,
started with the slump in petroleum prices in the is on top of the list. India with 190 million is
1980s, which led to the adoption of the Structural second, third is Pakistan with 100 million, fourth
Adjustment Program (SAP). The program is Indonesia with 95 million and fifth is Nigeria
invoked the withdrawal of government from with 59 million people (Findex, 2017). Earlier in
development programs. Agriculture suffered a 2014, it was reported that about 55 million
higher set-back and farmers were the first set of Nigerian adults (66 %) did not have access to a
casualties to slide into poverty. In the early 1980s transaction account (Findex, 2015). Since
less than 20 percent of the population was poor. Financial Inclusion is a key enabler to reducing
Within a decade the poverty incidence increased poverty and boosting prosperity, Nigeria was
to 65.6 percent in 1996. In 2010 the figure slightly chosen among the 25 priority countries that are
dropped to 62 percent (World Bank 2016, NBS part of the World Bank Group Universal Financial
2010). Currently, Nigeria is classified among the Access 2020 initiatives. The goal of the initiative
poorest countries in the world, with more than 50 is to extend access to financial services to all
percent of its population in abject poverty (NBS, adults by 2020. In response to that Nigeria made a
2019, World Bank 2018). Nigeria with 97 million, commitment to reduce the adult financial
is the second country with the largest number of exclusion rate from 46.3 percent in 2010 to 20
people after India (364 million people), living in percent by the year 2020. To attain this target, the
multidimensional poverty (Oxford PHDI (2018)). National Financial Inclusion Strategy (NFIS) was
The predominance of rural poverty over urban has launched on October 23rd, 2012. By the year 2016
been consistent since 1996, when more than 70 the financial exclusion rate has been reduced to
percent of rural households were poor, as 41.6 percent (Olaitan 2018).
compared with 58 percent of the urban The rate at which the committee is working, at an
households (IFPRI, 2010, NBS 2019). Since than average of 2 percent per year, it would be difficult
poverty has remained a rural phenomenon to meet the 2020 target. It is therefore not
afflicting peasant farmers, who depend on surprising that the chairman of the National
Agriculture for their livelihood (World Bank Financial Inclusion Strategy committee, shifted
Nigerian Journal of Agricultural Extension Special Edition, Vol, 21, Number 3, September 2020
the target to “achieving financial access to 95
percent of adults by 2024” (Emefiele, 2019). He
charged stakeholders to review and refresh the
strategy to achieve the 2024 target. This paper is
in response to that call. Since majority of the
unbanked adults in Nigeria are farmers, the
proposal is to use the agricultural transformation
strategy to reach more farmers. Nigeria adopted
the Agricultural transformation agenda in
2011(Akinwunmi (2012) and it was ratified in
2015 by the present administration (Obge, 2016).
One of the essences of the agricultural
transformation, among others, is building the
capacity of agricultural MSM enterprises along
the value chain to demand for financial services
and to improve the capacity of the financial
institutions to respond to the demand. It is
therefore an additional impetus to the other
strategies used in improved access to finance. All
that is required is fine-tuning it, applying the
requisite knowledge, strengthening institutions
and the institutional arrangements already in
place, and implementing it in a wholistic manner
to achieve the desired objectives.
The remaining part of the paper is divided into
eight sections. The second section discusses the
agricultural transformation from a global
perspective. Section three traced the adoption of
agricultural transformation in Africa, West Africa,
and Nigeria. Section four touched on the
agricultural value chain approach consisting of
the value chain analysis, development,
agricultural value chain financing and the de-
risking of the whole process. Section five briefly
introduced Islamic finance as part of other
innovative approaches. Section six enumerated
other requirements needed to make the whole
process work more effectively. Section seven
gave a summary of the discussions and finally
some recommendations are provided in section
eight.
A g r i c u l t u r a l Tr a n s f o r m a t i o n G l o b a l
Perspective
Agricultural transformation is the process by
which an agri-food system transforms over time
from being subsistence-oriented and farm-
centered into one that is more commercialized,
productive, and off-farm centered
(Timmer,1998). Agricultural transformation in
most areas of the world has generally been an
important component of broader economic
transformation processes (Mellor, 1976; Timmer,
1988). Economic transformation or structural
transformation also denoted as structural change,
109
refers to the movement of labour and other
productive resources from low-productivity to
high-productivity economic activities (UNCTAD
2016). It is the precursor to the overall economic
development. At the initial stage of development,
nations began with most of their population
engaged in agriculture. As development
progresses and the productivity per worker
increases, agriculture releases both human and
capital resources to the emerging manufacturing
and service sectors. The transition from
traditional, rural societies dominated by farm
systems with low productivity toward more
diversified, urban-centered societies with high
productivity, is a complex process that depends on
the country's resource endowments, institutions
and other factors (Laborde et-al (2019).
Structural transformation, as a process of change
in the production structure of an economy, is not a
new phenomenon. It started with the Industrial
Revolution of the 1700s in England, 1800s in
continental Europe and North America, and 1900s
in developing countries. The process follows the
same trend from mostly agrarian to a mix of
agrarian, industrial, and service economies
(Divanbeigi et-al 2016). As economies grow and
urbanize, services from commerce, finance, and
the state become increasingly important. Labor
productivity rises as labor migrates from less
productive agriculture to more productive
manufacturing and service sectors. This process is
generally driven by technical innovation, scale
economies, shifts to higher-return crops and
animal products associated with urbanization and
improving market access conditions, and the exit
of less productive laborers from farming. As a
result, agriculture declines in its relative share of
total gross domestic product (GDP) over time.
Robust economic transformation requires
diversification, sophistication, and specialization
of a country's agri-food system (Laborde et-al,
2019).
There are virtually no examples, except in the
cases of a handful of city-states, of mass poverty
reduction since 1700, that did not start with sharp
rises in employment and self-employment
income due to higher productivity in small family
farms (Lipton, 2005). It was also observed that no
country has undergone a successful structural
change towards higher levels of income per capita
without transforming its agricultural sector
(Divanbeigi and Saliola (2016)). Recently, AGRA
(2016) showed that Agricultural transformation
lies at the core of poverty reduction, food security,
and improved nutrition. With few exceptions,
110 An Innovative Way To Improve Agricultural MSME Access To Finance In Nigeria
countries that have moved toward middle-income
status have been initially driven along that path of
economic growth by the transformation of their
agriculture sector. Agricultural transformation is
characterized by the relative decline of basic
traditional agriculture and the rising importance
of agribusiness, as a result of improvements in
productivity, changes in composition of
production and changes in mode of
commercialization (Divanbeigi et-al (2016)).
There are instances where urban-based growth in
countries such as Angola, Nigeria and Equatorial
Guinea has at times been driven by primary
product exports (e.g., oil and mining) which are
not based on solid economic synergies with
surrounding rural areas, leading to urbanization
without industrialization or poverty reduction
(AGRA 2016).
Agricultural Transformation in Africa And
Nigeria
The Comprehensive Africa Agriculture
Development Programme (CAADP) is Africa's
framework for agricultural sector transformation,
part of the AU New Partnership for Africa's
Development (NEPAD). The African Union
Assembly of Heads of State and Government
adopted the Comprehensive Africa Agricultural
Development Programme (CAADP) in 2003 in
Maputo, Mozambique as the Flagship
Programme of the African Union for agriculture
and food security. The Maputo Declaration sets
broad targets of 6 percent annual growth in
agricultural GDP, and allocation of at least 10
percent of public expenditures to the agricultural
sector. The Maputo Declaration signaled strong
political resolve of African leaders to revitalize
agriculture as a driver of economic growth,
poverty reduction, food, and nutrition security
(AGRA 2016). It also signifies the role of the state
in driving agricultural transformation (Hailu
2013, Kalibata 2018).
During the 23rd Ordinary Session of the African
Union (AU) Assembly in 2014,which was tagged,
the African Year of Agriculture and Food Security
and the tenth anniversary of the adoption of the
Comprehensive Africa Agriculture Development
Programme (CAADP) at Malabo, Equatorial
Guinea, the African Heads of State and
Government adopted the Malabo Declaration on
Accelerated Agricultural Growth and
Transformation for Shared Prosperity and
Improved Livelihoods. The Malabo Declaration
sets the Africa 2025 Vision for Agriculture, which
is implemented within the Framework of CAADP
as a vehicle to implement and achieve the First
Ten Year Implementation Plan of Africa's Agenda
2063 (Assembly/AU/2(XXIII).
The implementation of CAADP encouraged
regional participation and coordination of its
activities. ECOWAS has initiated a political
dialogue involving member countries, socio-
p r o f e s s i o n a l a c t o r s , c i v i l s o c i e t y, a n d
development partners to define a regional
agricultural policy since early 2000s. The
dialogue focused on reviewing the regional
agricultural sector, its development potential, the
strengths and weaknesses of national agricultural
sectors, and the issues and challenges of
agriculture and food and nutrition security in the
region. As a result of this process, the Heads of
States adopted, at their 19 January 2005 meeting,
the Agricultural Policy of the West African States
ECOWAP, as an instrument for implementing
CAADP and established a regional action plan for
2006-2010. Nigeria signed the
ECOWAP/CAADP “pact” in late 2009, and the
elaboration of the NAIP led to a Medium-Term
Sector Strategy (MTSS) for Nigeria for the 2010-
2012 period. The agriculture policy measures in
the “7-point Agenda” comply with the major
orientations outlined in the CAADP (ECOWAS,
2009).
The Federal Republic of Nigeria instituted the
National Economic Transformation Agenda
whose aim is to diversify the economy from
reliance on oil, assure food security and create
jobs, especially for the youth in 2011. In line with
this, the Federal Ministry of Agriculture and Rural
Development adopted the Agricultural
Transformation Agenda (ATA) to promote
agribusiness, attract private sector investment in
agriculture, reduce post-harvest losses, add value
to local agricultural produce, develop rural
infrastructure and enhance access of farmers to
financial services and markets. The ATA sets out
to create over 3.5 million jobs along the value
chains of the priority crops of rice, sorghum,
cassava, horticulture, cotton, cocoa, oil palm,
livestock, fisheries, etc. for Nigeria's teeming
youths and women (AfBD, 2013).
Agricultural Value Chain Development
ATA adopted the agricultural value chain
development to make Nigeria an agriculturally
industrialized Economy by integrating food
production, storage, food processing and
manufacturing (Akinwunmi 2012). This signifies
the adoption of the value chain development
Nigerian Journal of Agricultural Extension Special Edition, Vol, 21, Number 3, September 2020
approach to derive the transformation agenda.
The value chain development approach consists
of agricultural value chain analysis and
development, which is aimed at building the
capacities of the value chain stakeholders to
absorb credit to increase efficiency and improve
market competitiveness. This is followed by the
Agricultural value chain financing, which is an
innovative way of channeling financial services to
the agricultural value chains through the value
chain actors, supporters or promoters. Finally, the
de-risking mechanism is put in place to
strengthen, consolidate, and sustain the
confidence of financial service providers to
continue serving the agricultural sector. The
implementation of the value chain development
approach under the ATA, which adopted the value
chain development and the de-risking
mechanism, did not yield the desired result of
increasing flow of funding to agriculture. Hence
the transformation of the sector from subsistence
to a commercial undertaking was not achieved.
The APC government resolved to continue with
the ATA in its Agriculture Promotion Policy
(2016-2020). It acknowledged that ATA is an
important first step towards re-discovering
agriculture, but pointed out that, the strategic
focus now is to build on the initial progress made
and transition Nigeria to a new plane in terms of
agribusiness performance by tackling input-
financing-storage-transportation-market access
issues in key value chains (Ogbe, 2016). The
agricultural value chain financing (AVCF)
component, missing in ATA, was introduced by
the APC government, as Anchor Borrower
Programme.
Agricultural Value Chain Financing (AVCF)
Agriculture, being the main source of livelihood
of majority of Nigerians and indeed others in the
Sub-Saharan African countries, has been
recognized as an important contributor to
sustainable development and poverty reduction in
those countries. However, for agriculture to play
that role, it must be transformed from being a
mere form of subsistence to a more dynamic
commercial business undertaking. This implies
that small holder farmers need to, constantly
adopt new and improved technologies as they
emerge, to enhance productivity, respond to the
ever-changing market demand and become
competitive in the global market. This calls for
increased and sustained investment not only in the
farm setting, but also along the entire agricultural
value chain. Investing in agriculture calls for
increased flow of funds to the sector. But the
111
agricultural sector has always been difficult to
finance through the formal financial institutions
and approaches (Miller and Linda 2011). There is
a general apathy by the formal institutions to lend
to small scale famers in Nigeria and other
developing countries. The reasons for the apathy
are rooted in the historic development of the
banks, the seasonal nature of agricultural
production due to its biological origins, the
inherent characteristics of the small-scale
farmers, and the systemic risks associated with
the sector.
AVCF is a financial approach and set of financial
instruments that can be applied for agricultural
and agribusiness financing. It is any or all of the
financial services, products and support services
flowing to and/or through a value chain to address
the needs and constraints of those involved in that
chain, be it a need to access finance, secure sales,
procure products, reduce risk and/ or improve
efficiency within the chain. AVCF is not a
development goal, but rather a means of
achieving other social and economic goals. It can
facilitate increased financial access and lower
agricultural costs and financing risks (Miller and
Jones 2010).
Agricultural value chain development and
financing are interwoven, and one is used the
complement the other. At the initial stage of value
chain development, Agricultural value chain
finance is used to strengthen the ties between
actors. It is, therefore, essential to analyze and
gain full understanding of the value chain in all
aspects before financing it. As the value chain
develops and stakeholders begin to understand it
and its financial needs and lenders begin to
appreciate the potentials of financing the value
chains, the overall effectiveness of those
providing and requiring agricultural financing is
enhanced. This symbiotic relationship can
improve the quality and efficiency of financing
agricultural value chains by identifying financing
needs for strengthening the chain and tailoring
financial products to fit those needs. As
agriculture is transformed and agribusiness began
to modernize with increased integration and
interdependent relationships, the opportunities
and the need for value chain finance becomes
increasingly relevant. Then the full potentials of
providing financial services to the agricultural
sector is realized by the financial institutions.
Some of the financial instruments that can be
applied for agricultural and agribusiness
financing under the Agricultural Value Chain
Financing are summarized in the table 1.
112 An Innovative Way To Improve Agricultural MSME Access To Finance In Nigeria
Nigerian Journal of Agricultural Extension Special Edition, Vol, 21, Number 3, September 2020
De-Risking Agricultural Value Chain
Financing
The declaration of the adoption of the Value Chain
Development approach by ATA, was followed
immediately by the creation of the Nigeria
Incentive-based Risk-Sharing System for
Agricultural Lending (NIRSAL). NIRSAL is a
dynamic, holistic approach that tackles both the
agricultural value chain and the agricultural
financing value chain. NIRSAL does two things at
once; fixes the agricultural value chain, so that
banks can lend with confidence to the sector and,
encourages banks to lend to the agricultural value
chain by offering them strong incentives and
technical assistance. Thus, at the first stage of the
transformation agenda, the PDP government in
Nigeria adopted the value chain development
approach and the de-risking mechanism. But it
did not have any program or project promoting
Agricultural Value Chain Financing. The
“Anchor Borrower” a pseudo AVCF instrument
was introduced by the APC government in 2016.
Nigeria Incentive-based Risk-Sharing System for
Agricultural Lending (NIRSAL) uses five pillars,
Risk-sharing, Insurance, Technical assistance,
holistic bank rating mechanism and Bank
incentive mechanism to de-risk agricultural
lending. Risk-sharing facility of $ 300 million is
used to share bank losses on agricultural loans.
Insurance Facility of $ 30 million, to expand
113
insurance products for agricultural lending.
Technical Assistance Facility of $ 60 million to
equip banks to lend sustainably to agriculture and
equip producers to borrow and use loans more
effectively. Holistic Bank Rating Mechanism of $
10 million to rate banks based on effectiveness of
their agricultural lending and its social impact.
Bank Incentives Mechanism of $ 100 million to
offer banks additional incentives to build their
long-term capabilities to lend to agriculture.
At take-off of NIRSAL, six pilot value chains
were selected based on their potentials, Tomatoes,
Cotton, Maize, Soya beans, Rice and Casava. The
targets were to generate an additional USD 3
billion of bank lending within 10 years and to
increase agricultural lending from the current 1.4
to 7 percent of total bank lending. Second is to
increase lending to the “pooled” small farmer
segment to 50 percent of the total (typically, banks
do not reach these producers individually but
through “pools”, i.e., aggregating mediators, such
as MFIs and cooperatives). Third is to reach 3.8
million agricultural producers by 2020 through
pooling mechanisms such as value chains, MFIs,
and cooperatives. Lastly is to reduce banks' break-
even interest rate to borrowers from 14 to 7.5-10.5
percent (CBN 2011).
The implementation of NIRSAL and its five
pillars will be administered by a Non-Banking
Financial Institution (NBFI.) At the national
114 An Innovative Way To Improve Agricultural MSME Access To Finance In Nigeria
level, the NBFI will administer the five NIRSAL
pillars. It will report to a Board of Directors,
chaired by the CBN and memberships from
AGRA, the Ministries of Agriculture, Finance,
and Commerce and Industry. The Board will have
ultimate decision-making and strategy-setting
responsibility for the Fund. The CEO of the NBFI
will be responsible for NIRSAL's overall
implementation and for maintaining relationships
with key stakeholders. At the regional levels,
Regional Transformation Engines will administer
NIRSAL, through Portfolio Investment
M a n a g e r s a n d a Te c h n i c a l A s s i s t a n c e
Representatives (CBN 2011).
It is important to critically re-examine the
activities being carried out by NIRSAL in line
with its original mandates. In all NIRSAL
documents, is has been stressed over and over,
that NIRSAL is a non-banking financial
institution, established to influence banks to
increase their lending portfolio to agriculture. It is
designed to remain a non-bank financial
institution, otherwise if it starts carrying out
banking activities, it will certainly behave like a
bank. Therefore, NIRSAL should not have any
business getting into banking either micro or
macro. There are government development
banks, such as Bank of Agriculture (BOA) and
Bank of Industry (BOI) that can do that job better.
But there is not any other institution in Nigeria
that can do NIRSAL job better. It is the only one
crafted for that job, as such, it should strictly
adhere to its mandate.
Other Innovative Financing Approaches
(Islamic Finance)
Agricultural value chain financing can be used to
increase access to financial services to small
holder farmers, micro, small and medium scale
enterprises along the agricultural value chain.
However, AVCF also uses interest rate as cost of
capital. In Nigeria there are people who will not
collect credit in this way because of religious
inhibition. As such, even if the ACVF has been
successfully enshrined in our agricultural
development, there are people that will still be
excluded from access to finance. Having gained
the recognition as one of the several agricultural
value chain services required to enhance
competencies, increase outreach, reduce
transaction costs and reduce risk for farmers and
stakeholders, finance is one of the instruments
used for poverty reduction. As such there is the
need to look for alternatives for this large group of
people. Luckily, the agricultural value chain
finance approach has recognized this problem and
accommodated Islamic finance in its operations.
In fact, some of the AVCF instruments are
borrowed form Islamic banking. In addition to
this the CBN has recognized Islamic banking and
can be used to improve access to finance.
Other Requirements to Improve Access to
Finance
The agricultural value chain financing and others
are referred to as innovative financing
approaches. This implies that the approaches are
new and are less developed than to the formal
forms of lending. As such these approaches would
work better if they were well understood and there
are collaborative arrangements for;
experimentation, sharing information, ideas,
experiences, and risks. This calls for the need to
build the capacities of the stakeholders to
appreciate, understand, and develop specific
skills and packages to implement them.
There is an urgent need for all stakeholders
involved in the value chain development to have
fair understanding of the Agricultural Value chain
Development approach. Hence the need for
capacity building of all stakeholders, especially,
Financial Institutions, value chain actors, Farmers
and Farmer Organizations. In addition to this, the
capability of the economy to continue providing
the services need to be carefully monitored by
paying special attention to the followings,
· Innovative Instruments and Delivery
Mechanisms
· Building Consistent and Reliable Data
base
· Strengthening the Financial Infrastructure
The financial sector infrastructure is made up of
support services for financial service providers,
such as domestic rating agencies, credit
information bureaus, audit firms, deposit
insurance agencies, training and technical service
providers, professional certification institutes and
the networks, associations, and apex
organizations of financial institutions. These
actors work to reduce transaction costs, improve
sector information, and market transparency,
increase access to refinancing and enhance skills
across the sector. They facilitate activities in the
financial sector, but do not themselves provide
retail financial services. The vitality of the
financial Infrastructure, or these meso level
institutions, has significant implications for
efforts to develop inclusive financial services
(IFC, 2011).
Nigerian Journal of Agricultural Extension Special Edition, Vol, 21, Number 3, September 2020
Summary
Poverty, with its consequential derivatives;
insurgency, kidnapping, cattle rustling and youth
restiveness, remains a challenge to Nigeria's
economic development since the early 1980s. At
that time less than 20 percent of the population
was poor, but by 1996, the incidence of poverty
reached 65.6 percent. Currently, Nigeria is
classified among the poorest countries in the
world, with more than 50 percent of its population
in abject poverty (NBS, 2019, World Bank 2018).
The poor are deprived of many things, one of
which is access to financial services. Nigeria has
the fifth largest number of people (95 million) on
earth, without a bank account (Findex, 2017).
Since Financial Inclusion is a key enabler to
reducing poverty and boosting prosperity, Nigeria
was among the 25 priority countries, chosen to be
part of the World Bank Groups Universal
Financial Access 2020 initiatives. The goal of the
initiative is to extend access to financial services
to all adults by 2020. Nigeria made a commitment
to reduce the adult financial exclusion rate from
46.3 percent in 2010 to 20 percent by the year
2020. The National Financial Inclusion Strategy
(NFIS) was launched on October 23rd, 2012. By
the year 2016 the financial exclusion rate has been
reduced to 41.6 percent (Olaitan 2018).
The rate at which the committee is working, it
would be difficult to meet the 2020 target. The
National Financial Inclusion Strategy committee
shifted the target to “achieving financial access to
95 percent of adults by 2024” (Emefiele, 2019).
Stakeholders were charged to review and refresh
the strategy to achieve the 2024 target. This paper
is in response to that call. Since majority of the
unbanked adults in Nigeria are farmers, the
proposal is to use the agricultural transformation
strategy to reach more farmers. Nigeria adopted
the Agricultural transformation agenda in
2011(Akinwunmi (2012) and it was ratified in
2015 by the APC government (Obge, 2016).
Agricultural transformation is the process by
which an agri-food system transforms over time
from being subsistence-oriented and farm-
centered into one that is more commercialized,
productive, and off-farm centered
(Timmer,1998). Structural transformation, as a
process of change in the production structure of an
economy, is not a new phenomenon. One such
transformation was the Industrial Revolution of
the 1700s in England and 1800s in continental
Europe and North America, and 1900s in
developing countries. The process follows the
same trend from mostly agrarian to a mix of
agrarian, industrial, and service economies
115
(Divanbeigi et-al 2016). As economies grow and
urbanize, services from commerce, finance, and
the state become increasingly important. Labor
productivity rises as labor migrates from less
productive agriculture to more productive
manufacturing and service sectors.
The African Heads of State and Government
adopted the Malabo Declaration on Accelerated
Agricultural Growth and Transformation for
Shared Prosperity and Improved Livelihoods
during the 23rd Ordinary Session of the African
Union (AU) Assembly in 2014. The Heads of
States of the West Africa adopted the Agricultural
Policy of the West African States ECOWAP, as an
instrument for implementing CAADP and
established a regional action plan for 2006-2010
at their 19 January 2005 meeting. Nigeria signed
the ECOWAP/CAADP “pact” in late 2009.
Federal Ministry of Agriculture and Rural
Development adopted Agricultural
Transformation Agenda (ATA) to promote
agribusiness, attract private sector investment in
agriculture. ATA adopted the agricultural value
chain development approach (Akinwunmi 2012).
The value chain development approach consists
of agricultural value chain analysis and
development, which builds the capacities of the
value chain stakeholders (actors, promoters,
supporters) to absorb financial services to
increase efficiency and improve market
competitiveness. This is followed by the
Agricultural value chain financing, an innovative
way of channeling financial services to the
agricultural value chains. Finally, the de-risking
mechanism is put in place to strengthen,
consolidate, and sustain the confidence of
financial service providers to continue serving the
agricultural sector and ensure its effective
utilization.
AVCF is a financial approach and set of financial
instruments that can be applied for agricultural
and agribusiness financing. It is any or all the
financial services, products and support services
flowing to and/or through a value chain to address
the needs and constraints of those involved in that
chain, be it a need to access finance, secure sales,
procure products, reduce risk and/ or improve
efficiency within the chain. AVCF is not a
development goal, but rather a means of
achieving other social and economic goals. It can
facilitate increased financial access and lower
agricultural costs and financing risks (Miller and
Jones 2010). Some of the financial instruments
used include, Products financing, Receivable
financing, Physical asset collaterization, Risk
mitigation products and Financial enhancements.
116 An Innovative Way To Improve Agricultural MSME Access To Finance In Nigeria
Nigeria Incentive-based Risk-Sharing System for
Agricultural Lending (NIRSAL) uses five pillars,
Risk-sharing, Insurance, Technical assistance,
holistic bank rating mechanism and Bank
incentive mechanism to de-risk agricultural
lending. The implementation of NIRSAL and its
five pillars will be administered by a Non-
Banking Financial Institution (NBFI.)
In addition to the Agricultural Value chain
financing, Islamic banking can also be used to
reach and improve access to finance to the poor
Muslims farmers, who will otherwise, be
excluded completely from financial services.
For the approach to work effectively the following
should also be in place:
· Build capacity of Financial Institutions to
understand and utilize Agricultural Value
Chain financing to lend to Agribusinesses.
· Build capacity of Value Chains and value
chain actors to demand and utilize financial
services and repay back of loans.
· Building Capacity of Farmers and Farmer
Organizations to participate in value chains
· Build the capability of the economy to
continue providing the needed services by
carefully monitoring and paying special
attention to the followings:
· Innovative Instruments and
Delivery Mechanisms
· Building Consistent and Reliable
Data base
· Strengthening the Financial
Infrastructure
Recommendations
· Agricultural value chain approach is
knowledge driven and heavily dependent
on the free flow of information among all
stakeholders (actors, supporters, and
promoters). A general sensitization is first
required to educate all stakeholders on the
workings of the value chains. This will be
followed by specialized capacity building
based on technical requirements.
· Build the capacity of financial institutions
to appreciate, understand and apply
agricultural value chain financing. Many
financial institutions lack adequate
knowledge of value chain financing
techniques and the skills to apply them. The
development banks and NIRSAL should
shoulder this responsibility, as one of the
de-risking mechanisms is improved access
to timely and necessary information.
· One of the prerequisites of agricultural
value chain finance is the existence of
functional and profitable value chains
capable of sourcing, utilizing, and repaying
credit. As such value chain development
should be an intrinsic function of the
ministry of Agricultural and Rural
Development.
· The strength of the chain is in its weakest
link. The small-scale farmers are the
weakest link. Small scale farmers, as well
as other MSM enterprises along the value
chain must be facilitated to form business
groups, association, and cooperatives. The
technical capacities of individual actors
must be built to appreciate and adopt
improved technologies. Collectively, the
financial, organizational, and managerial
capacities of the various groups must be
built, taking cognizance of the bonding,
binding, and linking relationships.
· Agricultural value chain finance is used to
reduce transaction cost and risk. There are
technologies that can be used to reduce
transaction cost further by helping to
deliver certain financial services virtually.
Arrangements must be put in place for a
d e d i c a t e d o ffi c e c h a rg e d w i t h t h e
responsibility of identifying, evaluating,
and applying appropriate technology in
value chain financing.
· Rebuild and strengthened the Financial
Sector Infrastructure. The financial sector
infrastructure is made up of support
services for financial service providers,
such as domestic rating agencies, credit
information bureaus, audit firms, deposit
insurance agencies, training and technical
service providers, professional certification
institutes and their networks, associations,
and apex organizations of financial
institutions. These actors work to reduce
transaction costs, improve sector
information, and market transparency,
increase access to refinancing and enhance
skills across the sector.
· Build a reliable Data base to support
financial institutions. The activities of the
Financial Sector Infrastructure actors
generate a lot of information. This must be
harnessed, analyzed and disseminated to
improve market transparency, increase
access to information and reduce
transaction cost of sourcing for similar
information for loan appraisal.
Nigerian Journal of Agricultural Extension Special Edition, Vol, 21, Number 3, September 2020
References
African Development Bank (2013): Nigeria
Federal Ministry of Agriculture and
Rural
D e v e l o p m e n t ;
Agricultural Transformation Agenda
Support Program Phase-1. Strategic

Environmental and Social
Assessment (SESA-Summary)
African Union (2014). Malabo Declaration on
Accelerated Agricultural Growth and

Transformation for Shared Prosperity
and Improved Livelihoods, 1(1), 1–5.

h p://doi.org/10.1007/s13398-
014-0173-7.
African Union (2015). AGENDA 2063: THE
AFRICA WE WANT (Popular
version -
F i n a l E d i t i o n ) ,
( S e p t e m b e r ) . R e t r i e v e d f r o m

h p://agenda2063.au.int/en/docu
ments/agenda-2063-africa-we-
want-popular-version-
f n a l -
edition.
Akinwumi A. (2012): Investing in Nigeria's
A g r i c u l t u r a l Va l u e c h a i n s .
Presentation at the
Bank of
Industry's Nigerian Investment
Forum London. July 30.
Divanbeigi Raian, Nina Paustian, and Norman
L o a y z a ( 2 0 1 6 ) : S t r u c t u r a l

Transformation of the Agricultural
Sector: A Primer. Research & Policy
Briefs No 2,
From the World
nd
Bank Malaysia Hub. 2 March 2016.
ECOWAS (2009): Regional Partnership
Compact for the Implementation of

ECOWAP/CAADP. Adopted during
the International Conference on
F i n a n c i n g R e g i o n a l

Agricultural Policy in West Africa,
Abuja (Nigeria), November 12, 2009.
FMARD (2011): Federal Ministry of Agriculture
and Rural Development Agricultural

Transformation Agenda: We will
Grow Nigeria's Agricultural Sector. A
blueprint for the
A g r i c u l t u r a l
Transformation Agenda. Abuja,
th
Nigeria, 9 September.
Hailu M. (2013). “Drivers of Success for
Agricultural Transformation in
Africa”. Brussel
D e v e l o p m e n t
Briefing No 33.
IFC. (2011): “Scaling Up Access to Finance for
Agricultural SMEs Policy Review

and Recommendations” Washington,
DC.
IFC. (2012): “Innovative Agricultural SME
Finance Models”. Washington, DC.
117
Islamic Development Bank Group. (2020).
Inclusive Growth: Making Value
Chains
Work
for Smallholder
Farmers. Jeddah, Kingdom of Saudi
Arabia.
Laborde D., T. Lallemant, K. McDougal, C.
Smaller and F. Traore (2019):

Transforming Agriculture in Africa
and Asia: What are the Policy
Options?
P u b l i s h e d b y t h e
International Institute for Sustainable
D e v e l o p m e n t ( I I S D ) ( 2 0 1 9 )

S t a b l e U R L :
h p://www.jstor.com/stable/resrep
22022.
Lipton, Michael, (2005). "
The family farm in
a globalizing world: the role of crop
science in allevia ng poverty," 2020
v i s i o n d i s c u s s i o n p a p e rs 4 0 ,
International Food
Policy
Research Institute (IFPRI).
Miller, C., and L. Jones. (2010). “Agricultural
Value Chain Finance, Tools and

Lessons.” Food and Agriculture
Organisation and Practical Action
Publishing.
Ogbe A. (2016): Agriculture Promotion Policy
(2016-2020); Building on the

Successes of
ATA, Closing Key
Gaps. The Green Alternative.
Oxford Poverty and Human Development
Initiative (2018). Global
Multidimensional
Poverty
Index 2018: The Most Detailed
Picture to Date of the World's Poorest
People,
University of Oxford, UK.
Seckler, D. (1993) editor: Agricultural
Transformation in Africa;
Proceedings of


the
seminar on Agricultural
Transformation in Africa held in
B a l t i m o r e , M a r y l a n d

May 27-29, 1992. Conducted by the
Center for Economic Policy Studies,
Winrock

International
Institute for Agricultural
Development.
Springer-Heinze, Andreas, (2018): ValueLinks
2.0. Manual on Sustainable Value

Chain
D e v e l o p m e n t , G I Z
Eschborn, 2 volumes
Webber C. M., and P. Labaste (2010): Building
C o m p e t i t i v e n e s s i n A f r i c a ' s

Agriculture A
Guide to Value
Chain Concepts and Applications.
The World Bank.