‘How financial institutions discourage agro-industrial development’
• ‘Reputation of insurance firms, a serious factor against agribusiness’
High lending interest rates by commercial banks in Nigeria and warped reputation of the insurance sector operators about non-payment of claims and high premiums have been identified as some of the strong factors impacting negatively on the development of the agricultural sector.
A Southwest Regional Manager, Agriculture Financing Desk at one of the old generation banks, confided in The Guardian that most banks do not lend from their cash flows to the agricultural sector, but from special interventions emplaced mostly by the Central Bank of Nigeria (CBN). Before the interventions, agricultural business financing for most banks were classified as an extremely risky lending zone.
The manager, who preferred anonymity, said, “What we do mostly is intervention funds [management]. We hardly process commercial loans for agribusinesses.”
The special interventions by the CBN include Commercial Agriculture Credit (CAC) schemes; Micro, Small, Medium Enterprise Development Fund (MSMEDF) and Differentiated Cash Reserve Regime (DCRR) and lately the Anchor Borrowers scheme.
“If commercial loans are processed,” he added, “it (interest rate) is from 18-25 percent. Also, pricing depends on the project amount, the gestation period, quality of security, among other factors. Retail ends are sometimes higher, based on prime lending rates for those products.”
Access Bank’s Head of Agric Desk, Opeyemi Olutayo, while addressing participants at the agro-food Nigeria exhibition in Lagos recently, affirmed the reluctance of financial institutions to play in the sector.
He categorically said Nigeria was faced with N800 billion funding gap in the agricultural sector, adding that, “but the government had done so much to bridge the gap,” apparently through the interventions.
Ayoola Fatona, Head, Agriculture and Micro Insurance/National Coordinator, Leadway Assurance Company, while speaking with The Guardian, said, “interest rate has a nexus to and reflects on the volume of agricultural credits available for agribusiness investors.”
He explained that if the interest rates for agricultural credits were high, the access to funding would become more restricted, thereby contributing to the underdevelopment of the sector.
However, he added, when the interest rates are low, many farmers will have access to credits and the volume of agricultural credits would increase, thereby contributing to the growth and development of the sector.
Fatona said: “Therefore, the fluctuations in interest rates are in an inverse proportionately related to the credit volume. The lower the interest rate, the higher access the customers have to a large volume of credits.”
Speaking from the insurance perspective, Fatona, however, said for agricultural insurance in Nigeria, “it has been confirmed that the premium rates charged by underwriters are the cheapest in comparison to any part of the world.”
That, he explained, is in view of the fact that insurance products in the country cover a multiplicity of perils which may affect the farmers’ investments at a single rate.
“For instance, the indemnity-based and area yield crops insurance policy covers the multiple perils of flood, lightening, windstorm, fire, flood, pests and diseases, and other natural occurrences that are beyond the control of the farmer. These perils are bundled together under one policy and a single premium rate that normally do not exceed 5 percent of the sum assured is charged,” Fatona explained.
He said in Europe and Latin America, these perils are covered and priced separately as single risks. This results in higher premium charges in the insured (farmers). Separate premium rates apply to each perils to be covered, thereby making it more expensive.
Contrary to this, Mr Ajileye Samuel, an audit specialist, said claim payments in other climes are prompt, accounting for the goodwill insurance firms enjoy in those places. Rate of premiums is immaterial, Ajileye said, as long as prompt payment of claim is obtainable because the essence is restoration of losses and sustainability of the insured businesses.
Fatona admitted that payment of claims is a critical aspect of any insurance contract and that this is more applicable in agriculture where the processes and operations are time-bound.
“When insured farmers have a claim and they are not paid promptly, it may be impossible for them to go back to the farm during a particular farming season or replace the batch of poultry birds they have lost after the occurrence of a claim. This will adversely affect the growth and development of the agricultural sector,” he said.
However, he said on-the-field experiences have shown that insured farmers expect so much from the insurance companies whenever they suffer a loss. Their mindset, he added, is that the insurance companies must pay for all losses even in situations where the perils that are responsible for the losses are not covered under the policy.
For instance, he said, an insured poultry farmer is expected to vaccinate his birds against some poultry diseases to prevent outbreaks, and in doing so, he must, as a matter of best practices, follow a particular regime or programmes.
“If this is not done and the birds come down against these diseases, he will still expect the insurance company to compensate him for the loss of these birds, attributable to his negligence,” he added.
Fatona argued that for agricultural insurance, there is a strong correlation between bad farm management practices and the occurrence of perils insured in the policy.
“Bad farm management practices can spark off the occurrence of a peril insured under the policy. Insured, farmers and other agricultural investors are advised to adhere to good farm management practices and behave as if they are uninsured all the time. This will enable the insurance companies to promptly attend to their claims with acrimony,” he said.
Ajileye told The Guardian that statistics on the patterns of lending of commercial banks in Nigeria had indicated that the policies are not farming-friendly.
“My view, based on facts and figures, is that commercial banks have not been lending to the real sectors – agriculture and manufacturing. This can be verified by looking at lending statistics of banks released by the National Bureau of Statistics (NBS). You will discover that much of their lending goes to portfolio investors like oil and gas, capital market, trading and procurement,” Ajileye said.
David Ayodele, agribusiness consultant and cassava economics specialist, said commercial banks, until recently, had deliberately tailored their lending direction against agriculture, and that new policies on agro-allied lending had not been attractive to them.
Ayodele said financial institutions, no doubt, play a significant role in agricultural development, but high interest rates, late release of credit facilities and undue officialdom/bureaucracy often weaken their efficiency and delivery.
He said some commercial banks charge up to 20 percent interest with attendant unimaginable administrative processes, making it unserviceable and unprofitable for farmers and processors to explore borrowing.
“Thus, it becomes almost impracticable for agribusiness to thrive under the high interest rates operated by commercial banks in the face of some daunting uncertainties, such as vagaries of weather, price fluctuations and insecurity,” Ayodele submitted.
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