AFRICA AGRICULTURE STATUS REPORT 2016

drawing down assets, and 25 percentage points less
likely to anticipate reducing meals upon receipt of a
payout (Janzen & Carter, 2013). Farmers who can
obtain weather-based insurance have better access
to other forms of financing as well (Ruete, 2015).
Weather insurance, however, is in no way a
panacea and will only succeed if challenges related
to production, marketing and sale of crops, etc., are
addressed. Effective index-based weather insurance
also requires reliable, timely and high quality weather
data. More often than not, this is lacking in many
African countries, as most countries do not have 10–
20 years of historical rainfall data, while collecting,
verifying and analyzing the data is time consuming.
An enabling legal and regulatory environment is
also key for the success of the insurance scheme.
This is particularly important where the schemes in
different countries, and differing insurance regulatory
environments may pose a particular challenge.
Credit Guarantees: Credit guarantees are normally
used to complement the security offered by the
borrower in case the lender considers it insufficient.
The approach is to provide a partial credit guarantee
to financial institutions without necessarily relieving
them of their credit responsibility. These schemes
are designed such that on one side are financial
institutions, including banks and microfinance
institutions which extend credit to clients, and on
the other is the guarantee provider. Typically a fund
is set up by an international institution or a central
bank which shares the default risk with the financial
institutions. Credit guarantees thus improve access
of farmers and small agribusinesses to finance,
while compensating the lender for part of the risk,
should the borrower default.
Although not widespread in Africa, credit guarantees
are not new in the region. As early as 1977, Nigeria
established, through a decree, the Agricultural Credit
Guarantee Fund Scheme (ACGSF). The aim of the
scheme was to encourage banks to lend money to
all categories of farmers by providing guarantees
on loans granted by commercial banks for the
agricultural purposes defined by ACGSF. A revamped
version of the ACGSF, the Nigeria Incentive-based
Risk Sharing System for Agricultural Lending
(NISRAL) was recently launched (see Box 7.2).
NIRSAL, an initiative of AGRA and the Central Bank
of Nigeria (CBN), the Bankers Committee and the
Federal Ministry of Agriculture & Rural Development
(FMARD), provides guarantee in the form of Credit
Risk Guarantee (CRG) as comfort for banks to lend
Box 7.2:
The Nigeria Incentive-Based
Risk Sharing System for
Agricultural Lending
Objectives: NIRSAL aims to increase the productivity of
the Nigerian agricultural sector by mobilizing financing for
Nigerian agribusiness. The aim is to generate an additional
US$3 billion in agricultural financing over 10 years
by incentivizing banks to increase the availability of capital
in the market. NIRSAL recognizes the need for a holistic
approach. In addition to encouraging banks to lend,
the system provides support to farmers and enterprises
along the agricultural value chain through business and
technical training.
Operations: NIRSAL was designed by AGRA on behalf
of the Central Bank of Nigeria. It was capitalized at
US$500 million and has five pillars: (i) a Risk Sharing Facility
(US$300 million to leverage US$3 billion in loans to
the agricultural sector); (ii) a technical Assistance Facility
(US$60 million to support both borrowers and lenders);
(iii) an Insurance Facility (US$30 million to develop innovative
and affordable insurance products); (iv) a bank
Incentive Mechanism (to further incentivize banks which
demonstrate effective and significant lending to the agricultural
sector; and (iv) Bank Rating Mechanisms (to
rate banks and determine which ones should be further
incentivized). NIRSAL provides Credit Risk Guarantee
(CRG) as a comfort for banks to lend and also incentivize
farmers through provision of Interest Drawback Program
(IDP) to be paid quarterly based on the agricultural project.
The guarantee ranges from about 30–75 percent,
depending on the agricultural value chain involved. IDP
also ranges from 20–40 percent depending on the category.
A Technical Assistance Facility trains farmers and
builds the capacity of banks and microfinance institutions
to lend sustainably in agriculture.
Target: NIRSAL targets all actors in the agricultural value
chain.
Outcomes: From inception in 2012 to date, 454 projects
valued at ₦61 billion (US$273 million) have been guaranteed
by NIRSAL and enabled 3 private insurance companies
to expand their portfolios to include agricultural
finance. Furthermore, ₦753.36 million (US$3.36 million)
was paid out as interest rebate to borrowers who repaid
promptly to encourage good repayment behavior, thereby
minimizing default. In addition, by the end of 2014
NIRSAL had trained 27,142 farmers across the country.
162 AFRICA AGRICULTURE STATUS REPORT 2016