AGRICULTURAL VALUE CHAIN: AN APPROACH TO VALUE CHAIN 6
Agricultural Finance and Insurance
Agriculture is the main source of income and employment for the 70 percent of the world's poor, who live in rural areas. Yet, only 10 percent of gross domestic product (GDP) in low and middle income countries is generated by the agricultural sector. This results in the severe difference between the proportion of people employed by the agriculture sector and the proportion of GDP attributable to agricultural production. In developing countries, most actors in the agricultural sector are small scale agricultural producers and small, non-farm entrepreneurs involved in a variety of microenterprises with diversified, yet limited income sources. A majority of these households have little or no access to formal financial institutions or adequate financial services. Due to this lack of access, most rural poor, youths and low income households rely on costly informal sources of finance (for example, input supplier credit, trader credit, or self-financing). None of these allow them to take full advantage of economic opportunities. Financial institutions (FIs), such as commercial banks and microfinance institutions, can play an important role in financing the gap by expanding operations into rural areas to serve the needs of this large sector.
What is agricultural finance?
Agricultural finance is a concept that comprises financial services for agricultural production, processing, and marketing. It includes short, medium, and long term loans, leasing, savings, payment services, and crop and livestock insurance. This guide focuses on financing agricultural businesses, primarily small and medium farmers, who tend to be located in rural areas. Providing services to these types of clients spread out in rural areas can increase transaction costs. The concept of agricultural value chain finance emphasizes the vertical dimension of agricultural finance between different segments of agricultural value chains. Financial Institutions must look at agricultural finance holistically; as the full range of activities involved in getting a product or service through different phases of production and delivery to the final consumer.
Sources and types Agricultural finance
Basically there are two major sources of agricultural finance in Nigeria. These sources are the
a. formal financial institutions and
b. the informal sector.
a. The formal sector which constitute of both the government and private financial institutions provide formalized form of credit to meet production, processing, marketing and consumption needs of the agricultural entrepreneur. Some of the public institutions that provide such services include:
i. Bank of Agriculture (BoA),
ii. Bank of Industry (BoI)
The Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) is an initiative of the Central Bank of Nigeria (CBN), the Bankers Committee (BC) and the Federal Ministry of Agriculture & Rural Development (FMA &RD). it is an innovative platform aimed at providing guarantee in form of Credit Risk Guarantee (CRG) as a comfort for the Banks to lend and also incentivize the farmers through provision of Interest Drawback Program (IDP) to be paid quarterly based on the agricultural project. The Guarantee ranges from about 30-75% depending on the Agricultural value chain involved. IDP also ranges from 20-40% depending on the category. All actors in the agricultural value chain can benefit under NIRSAL. It's a financing initiative that will provide farmers with affordable financial products and reduce the risk of granting bank loans to farmers.
General Requirements for accessing NIRSAL fund
1. You will have to open an account with the Bank
2. The Agricultural value chain where you operate must be clearly identified
3. Availability of off takers must be identified and contract agreements must be sought
4. Payment of annual 3% CRG for guaranteed portion based on the classification of the client project
5. Eligibility for IDP on the commercial interest charged is at the NIRSAL's discretion and to be paid quarterly
6. Equity contribution between 0 - 20%
7. Interest rate is at commercial rate
8. The borrower must have an Insurance Policy from Nigeria Agricultural Insurance Corporation (NAIC)
9. Collateral Required
10. Maximum Credit: Subject to the request
11. Maximum Tenor: Not fixed, based on the request
12. Pricing: Commercial rate
2. The Agricultural value chain where you operate must be clearly identified
3. Availability of off takers must be identified and contract agreements must be sought
4. Payment of annual 3% CRG for guaranteed portion based on the classification of the client project
5. Eligibility for IDP on the commercial interest charged is at the NIRSAL's discretion and to be paid quarterly
6. Equity contribution between 0 - 20%
7. Interest rate is at commercial rate
8. The borrower must have an Insurance Policy from Nigeria Agricultural Insurance Corporation (NAIC)
9. Collateral Required
10. Maximum Credit: Subject to the request
11. Maximum Tenor: Not fixed, based on the request
12. Pricing: Commercial rate
The private sector formal institutions on the other hand include:
i. Commercial Banks through the ACGSF and RUFIN
ii. The Micro-finance Banks
All the formal financial institutions only provide credit facilities to those clients that are doing business with and that meet the minimum criteria for loan and other credit facilities. For details and how to source for finance from any of the above mentioned institutions, just visit any of their branches for the details and the requirements which differ from bank to bank.
b. The informal sector or sources of finance in the rural area include the following:
i. Local money lenders
ii. Family and friends
iii. Personal savings
iv. Esusu or Adashe
These sources respond to the immediate need of the entrepreneur, even though in small quantity and very expensive. They are available and faster to get credit than from the formal sector.
Why the need for agricultural finance
Small scale Farmers and entrepreneurs in general require financing due to the small nature of their businesses which limits their finances. They therefore need external funding in form of credit to implement their plans. Some of the reasons for credit or additional financing for farmers include:
i. For expansion of the business in order to generate more profits.
ii. To meet production targets set by the entrepreneur. This will mean additional funding.
iii. To reduce risks of cash squeeze during the production process.
iv. To enable the entrepreneur obtain better prices for his products through storage for sale at a later date when prices are right.
v. For acquisition of better production and processing technology that will improve quality of produce for higher profits.
How to manage finances
It is important for an entrepreneur to know how finances can be managed for better profits. This will ensure success and better repayment rates. The entrepreneur should be able to:
i. Have a good record of all his activities. This helps in guarding against mistakes of the past. It also forms the basis for bank loan and budget preparation.
ii. Plan very well on how to use the financing through proper business plan and good budget for the implementation of the plan. This should be followed religiously for success.
iii. Avoid diversion of the fund to other non-productive sectors. This diversion can create financial squeeze on your plans and consequently failure.
iv. Money not needed immediately by the business should be kept in the business account to avoid misuse and risks.
Loan repayment
As an entrepreneur borrows money from any financial institution, he should not assume it to be part of the National cake. The plan for its repayment should be included in your financial cash flow. The loans should be repaid as at when due. This will enable you apply for new one and reduces stress on your finances.
Agricultural Insurance
As your business of agriculture progresses, the nature of the business calls for some insurance cover to reduce risks associated with production, processing and marketing of your produce. It is well documented that risks are not just concentrated at the producer level of the value chain as one might expect but are prevalent at all levels. Agriculture is an inherently risky industry, and risks faced by actors in the value chain ultimately translate into risks that Financial Institutions must take into account when evaluating profitability of an investment opportunity. This section will therefore take a look at:
What is agricultural insurance?
In general, insurance is a form of risk management used to hedge against a contingent loss. The conventional definition is the equitable transfer of a risk of loss from one entity to another in exchange for a premium or a guaranteed and quantifiable small loss to prevent a large and possibly devastating loss. Agricultural insurance is a special line of property insurance applied to agricultural firms. Agricultural insurance is not limited to crop insurance, it also applies to livestock, brood stock, forestry, aquaculture, and greenhouses.
Why agricultural insurance is considered as a special line of insurance.
There are several features of this type of insurance that validate it being treated as a special line of business. Difficulties in achieving adequate diversification because of the nature of the risk, asymmetries of information in underwriting, the geographical dispersion of agricultural production and the complexity of the biological processes of production, which requires skilled and expert underwriting, justify it being considered a special business line.
Why the need for insurance
Agricultural insurance is important and needed by entrepreneurs in order to reduce the risks associated with production, processing and marketing. This risks come in different forms and can affect efficiency of the farmer as a result of conditions which are mostly beyond the control of the farmer. The risks can wipe out a whole investment especially those that occur through natural disasters such as flood, fire outbreak, pest, diseases and drought.