What are the challenges to successful capital allocation for the production, trading and processing of agro-commodities in Nigeria?
BALOGUN: Agriculture remains pivotal to the development of Nigeria’s economy, contributing an average of 23% to the country’s GDP per year over the last decade. The agriculture sector grew by 1.34% year-on-year in real terms in the third quarter of 2022, an increase of 0.12 percentage points from the corresponding period in 2021, and an increase of 0.14 percentage points from the preceding quarter. Overall, the sector saw an annual growth rate of 2.1% in 2021.
Lack of access to financial products is impacting the development of the sector. This is due to several factors, such as insufficient infrastructure that weighs on transaction costs and risks associated with weather, price volatility, and market fluctuations. Moreover, financiers lack the requisite experience to assess the value of agro-products, which is accentuated by the onerous guarantees demanded of underprivileged farmers.
Unfortunately, the availability of finance for rural development is often limited compared to the supply of finance for urban projects. This is often due to vulnerability constraints, such as systemic market and credit risks; capacity limitations, including infrastructural and technical factors; and policy and regulatory restrictions, such as political and social interference.
Which innovative financing structures are stimulating agro-finance flows in Nigeria?
BALOGUN: Financing contributes towards sector development when it introduces novel approaches or financial products to address established problems, extends proven financial products to new markets or customers, and attracts new types of investors or sources of capital. Moreover, while public sector investment is vital, private involvement is central to efforts initiated by the government. Innovative financing structures in Nigeria include value chain finance (VCF) with output buyers, indirect finance through cooperatives and warehouse receipt financing systems.
More specifically, the VCF model is an approach based on business relationships in the value chain instead of the creditworthiness of individual farmers. VCF includes financial flows between value chain actors such as buyers or input suppliers, as well as flows from financial institutions to the value chain, or combinations of both. Conversely, cooperative financing entails indirect loans issued to smallholders by banks through aggregator organisations such as a farmer-based cooperative. In this model, the group members guarantee each other as the entire group is the borrower. Finally, warehouse receipt financing is a form of secured lending to owners of non-perishable commodities stored in a warehouse and assigned to a bank through warehouse receipts.
Why is risk management critical to unlocking financing for agriculture and how does a commodities exchange help in this regard?
BALOGUN: Uncertainties inherent in weather, diseases, natural disasters, and market and environmental shocks affect the sector. Climate change and the volatility of food prices have aggravated some of these risks. The livelihoods of smallholders are especially impacted because they struggle to assess and manage risks, and fail to benefit from financing and investment opportu-nities that could improve their profit margins.
The main challenges for the financial markets include managing unique risks in agriculture, high transaction costs when dealing with a large number of small farmers and micro-, small and medium-sized enterprises along the agriculture value chains, and the limited expertise of financial institutions in managing agricultural loan port-folios. Commodity exchanges help to overcome such challenges by strengthening the finance markets. This entails leveraging digital platforms to provide solutions for agriculture lenders to access long-term finance, manage risks and enhance agriculture asset classes.
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