ENHANCING CREDIT FLOW TO THE AGRICULTURAL SECTOR: THE CASE OF CENTRAL BANK OF NIGERIA s COMMERCIAL AGRICULTURE CREDIT SCHEME (CACS)

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1 ENHANCING CREDIT FLOW TO THE AGRICULTURAL SECTOR: THE CASE OF CENTRAL BANK OF NIGERIA s COMMERCIAL AGRICULTURE CREDIT SCHEME (CACS) By I.M. Polycarp and B.O. Odufote Central Bank of Nigeria Paper presented atthe 8th Biannual Congress of the Africa Farm Management Association (AFMA) held at the Sarova Panafric Hotel, Nairobi Kenya, 25-29th November 2012

2 Presentation Outline INTRODUCTION THE N200 BILLION COMMERCIAL AGRICULTURE CREDIT SCHEME (CACS) BANKS PARTICIPATION UNDER CACS STATE GOVERNMENTS PARTICIPATION NUMBER OF PROJECTS PARTICIPATING AMOUNT DISBURSED TO PROJECTS JOB CREATION PENALTIES ON INFRACTIONS BY BANKS EFFECT OF CACS ON BANK CREDIT TO AGRIC. SECTOR AND AGRIC SECTOR GROWTH RATE CACS ACCOUNT BALANCE (TEMPORAL DYNAMICS) CACS CHALLANGES CONCLUSION AND RECOMMENDATIONS 2

3 INTRODUCTION NIGERIA AT A GLANCE POPULATION: Million GDP: $235.9 Billion LAND MASS: 924,000 KM 2 % OF POPULATION BELOW POVERTY LINE: 55% POPULATION IN AGRICUTURE: 60% Source: World Bank (Various Issues) Agriculture in Nigeria accounts for 38.54% of the Gross Domestic Product and is the most important sector of the economy from the standpoint of rural employment and provision of food. 1 3

4 INTRODUCTION CENTRAL BANK OF NIGERIA (CBN) The CBN is the apex regulator of the Nigerian Banking sector. The Bank undertakes development financing in Nigeria with a focus on protecting the livelihood of the majority of the rural dwellers who are engaged in agriculture, the major contributor to GDP and assist urban dwellers with gainful employment. To discharge its developmental functions, the bank has over the years Promoted several agricultural finance programmes/schemes like the Agricultural Credit Guarantee Scheme (1978), Agricultural Credit Support Scheme (2006), the Commercial Agriculture Credit Scheme (CACS) and the Nigeria Incentive Based Risk Sharing System for Agricultural Lending (NIRSAL) Commercial Agriculture Credit Scheme (CACS) is arguably the most ambitious agricultural credit support scheme of the Central Bank of Nigeria (CBN) having involved the injection of N200 billion CBN)Fund for financing of agriculture across the value chain. NOTE: N = $1.00 (US) 1 4

5 OBJECTIVES OF THE PAPER Track and assess performance of CACS in respect of bank participation, since inception in 2009 Identify problems/challenges affecting performance of the scheme METHODOLOGY CACS being 3 years old is not ripe for an exhaustive impact assessment. The approach adopted in this paper is to present and discuss relevant output indicators by use of descriptive and inferential statistics. 1 5

6 THE N200 BILLION COMMERCIAL AGRICULTURE CREDIT SCHEME (CACS) The global economic meltdown of 2008 resulted in a myriad of economic woes like stock market crashes, declining real output and slowed economic growth, weakened financial systems typified by takeovers and bankruptcies, loss of jobs as well as loss of confidence in financial markets etc. The Nigerian economy which was not immune from the crises also suffered from the contagion effect. The N200 billion Commercial Agriculture Credit Scheme (CACS) was one of the responses by Nigerian Government and regulatory authorities to curb the crippling effects of the crisis. NOTE: N = $1.00 (US) 6

7 THE N200 BILLION COMMERCIAL AGRICULTURE CREDIT SCHEME (CACS) CACS was approved on March 10, 2009 and will run for 7 years. OBJECTIVES OF THE SCHEME: Fast track development of the agricultural sector. Enhance national food security. Help to reduce the cost of credit in agriculture. Increase output, generate, employment, diversify the revenue base, and increase foreign exchange earnings. The Fund is made available to participating banks to finance private commercial agricultural enterprises and State Government projects at a maximum of 9% interest rate. FUNDING: The Scheme has a seed fund of N200billion being proceeds of the N200 billion three year bond raised by the Debt Management Office (DMO). 1 7

8 THE N200 BILLION COMMERCIAL AGRICULTURE CREDIT SCHEME (CACS)?? PLANNING STAGE & ESTABLISHMENT (2009) *Drafting of Guidelines *Mobilization of funds TERMINATION STAGE (2016) *Withdrawal of funds from Banks *Winding up *Evaluation of the Scheme CACS DISBURSEMENT STAGE *Fund releases to banks * Monitoring of Projects POST DISBURSEMENT STAGE * Monitoring of Projects * Renewal/restructuring of facilities) Our Current position in the cycle 8

9 Banks Participation under CACS by Number ( May 2012) 1. UBA (450%) 11 5 (45.45%) 18 out of 22 Nigerian Banks are Participation under CACS by May 31, 2012 i.e. 81.8% participation 16 2 (12.5%) (May) FBN 3. Zenith Plc 4. Fidelity 5. GTB 6. Union 7. Unity 8. Access 9. Eco bank 10. Skye 11. Stanbic IBTC 12. Citi bank 13. Mainstreet 14. Wema 15. Sterling 16. Diamond 17. Enterprise 18. FCMB 9 Source: Central Bank of Nigeria, 2012

10 State Governments' Participation under CACS by Number ( May 2012) (11.1%) 9 (50%) (May) 1. Anambra 2. Enugu 3. Sokoto 4. Gombe 5. Kwara 6. Niger 7. FCT 8. Bauchi 9. Kogi 10. Nasarawa 11. Ondo 12. Zamfara 13. A/bom 14. Adamawa 15. Kebbi 16. Rivers 17. Taraba 18. Imo 19. Edo 20. Kano 21. Ogun 22. Osun 23. Benue 24. Plateau 25. C/Rivers 26. Bayelsa 27. Delta 28. Ekiti 29. Abia 30. Oyo 30 out of 37 States are Participation under CACS by May 31, 2012 i.e % participation Source: Central Bank of Nigeria,

11 State Governments' Participation under CACS by Geo-political Zones 4 (13.3%) 4 (13.3%) 7 (23.4%) 5 (16.7%) 4 (13.3%) The north central region has the highest number of States (7) participating under CACS Source: Central Bank of Nigeria, (20%)

12 Total Number of Projects' Participating under CACS ( May 2012) (24.74%) (90.75%) (84.47%) (May) Source: Central Bank of Nigeria,

13 Number of Private Projects Participating by Geographical Regions Funds Release by Geographical Regions (N Billion) Northeast, 11.19, 5.9% Southsouth % Northwest, 26.37, 14% (43.8%) North Central, 23.24, 12.3% Southwest, 87.66, 6.35% (19.3%) 23 (9.9%) 28 (12.0) 11 (4.7%) Southeast, 9.84, 5.2% 24 (10.3) Northwest Southwest Southeast NOTE: North Central Northeast Southsouth N = $1.00 (US) Source: Central Bank of Nigeria, 2012 The Southwest region of Nigeria has the highest number of projects and attracts the largest quantum of funds under CACS 1 13

14 Amount Disbursed to Projects under CACS N'billion ( May 2012) (123.4%) (56%) (25.34%) (May) NOTE: N = $1.00 (US) Source: Central Bank of Nigeria,

15 Value of funds released (N billion) to projects under CACS by Value Chain Distribution (May, 2012 ) Number of Projects Participating under CACS by Value Chain Distribution (May, 2012 ) Marketing, 16, 8% Storage, 11, 5% Input Supplies, 1, 1% (51%) (34%) Processing, 78, 38% Production, 97, 48% (1%) 15.3 (10%) The processing segment of the value chain attracted the highest quantum of funds under CACS (77.6 billion) i.e. 51% of funds so far disbursed 6.1 (4%) Input Supplies Production Processing Marketing Storage The production segment of the value chain attracted the highest number of projects under CACS (97) i.e. 48% 15

16 Project State Government Job Creation under CACS Skilled Uskilled Indirect Total 2, ,342 20,198 Private , ,774 Total 4,276 15,354 17,342 36,972 Indirect jobs constitute employment generated by State Governments under outgrower schemes Source: Central Bank of Nigeria, 2012

17 Penalties invoked on Banks for infractions on the specifications of the CACS Guidelines Participating Bank Penalty Charge (N million) Union Bank Plc 215,994, Unity Bank Plc 12,205, UBA Plc 83,071, FBN Plc 27,558, Skye Bank Plc 129,347, Stanbic IBTC 48,708, Total 516,885, Stanbic Skye FBN UBA Unity Union NOTE: N = $1.00 (US) Source: Central Bank of Nigeria,

18 An Increase in Bank lending to the Agric. Sector from 1.4% in 2009 to 2.1 in 2011 was witnessed. Disbursement under CACS BANK CREDIT TO AGRIC SECTOR Statistical analysis revealed a strong positive correlation of 0.89 between CACS disbursements and Bank Credit to the Agric Sector from 2008 to ' 2009' 2010' 2011' Source: Central Bank of Nigeria, various issues

19 Although there was an increase in bank lending to the agric sector, a significant effect of CACS on the Agric. Sector GDP Growth Rate could not be established as it had been plummeting from 2008 to 2011 Agric. Sector Growth Rate ' 2009' 2010' 2011' Source: Central Bank of Nigeria (various issues) 5.64 Why CACS did not seem to impact on Nigeria s Agric. Sector GDP growth rate Statistical analysis revealed a strong negative correlation of between CACS fund disbursements and Agric Sector GDP growth rate Nigerian Agriculture is a large sector (38.54% GDP) dominated by small holder farmers while CACS is targeted towards commercial farms. Projects have different cash conversion cycles Some projects are yet to fully deploy the funds due to LC issues/ delayed imports, poor management, nondisbursement by banks etc Short-run effects may be misleading 19

20 CACS Account Balance N'billion ( May 2012) Depletion of CACS fund likely before or by year end 2012 with post disbursement era imminent April' (May) December 2012' 0? NOTE: N = $1.00 (US) 1 20 Source: Central Bank of Nigeria (various issues)

21 CHALLENGES of CACS PRE-IMPLMENTATION INACTIONS -There was no ex ante baseline study to identify number, spread and financial needs of would-be beneficiaries. -No capacity building for executors of the Scheme. -No seminars/consultations with stakeholders before take-off of the scheme. -Technical capacity of banks was not taken into cognizance -Delayed take-off due to non-clarity of implementation modalities. POST IMPLEMENTATION CHALLANGES -Monitoring by banks below optimal levels -Infractions by banks (nondisbursement and diversion of funds) -There is no leverage going on as banks are not lending from their balance sheets under CACS. 21

22 CONCLUSION In spite of several challenges, the Commercial Agriculture Credit Scheme has no doubt impacted on the Nigerian Agricultural economy after only 3 years of operation. This is through job creation and encouraging more Nigerian Banks to lend to Agriculture which led to an increase in credit flow to the agricultural sector from 1.4% in 2009 to 2.1% in But is that all we can expect from CACS?. 22

23 CONCLUSION The performance of the Scheme could be improved between now and the sunset date (2016). 23

24 RECOMMENDATIONS -Capacity building for bank staff and value chain actors on agricultural financing. Banks and farmers must begin to view agriculture as a profitable business activity and not a government support/development programme. -An adequate monitoring framework should be designed and implemented -A road map showing specific targets and timelines should be earmarked. -Sanctions for erring banks should be stepped-up to discourage infractions. -Banks that lend to agriculture from their balance sheets should be accorded special incentives by the Central Bank as a source of encouragement. 24

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26 The views expressed in this paper are of the authors and do not represent the position of the Central Bank of Nigeria 1 26