Commercial Banks’ Response to 
Government’s Financial Stimulus 
for Improved Agricultural 
Financing in Nigeria 

Aderibigbe S. Olomola and Maryam Yaro  

May 2015 

WORKING PAPER NO. 28 



 

i 

TABLE OF CONTENTS 

Abbreviations and Acronyms ....................................................................................................................................................... ii 

Abstract ....................................................................................................................................................................................... iii 

1. Introduction ............................................................................................................................................................................. 1 

2. Lending to the Agricultural Sector by Commercial Banks in Nigeria: Challenges and Opportunities .................................... 4 

3. Analysis of Commercial Banks’ Response to Government’s Financial Stimulus for Agricultural Lending ........................... 10 

4. Summary, Policy Implications, and Conclusions .................................................................................................................. 20 

References ................................................................................................................................................................................. 24 

LIST OF TABLES 

Table 3.1—Loan application rejection rates under the Commercial Agriculture Credit Scheme, 2010 .................................... 12 

Table 3.2—Loan application rejection rates under the Commercial Agriculture Credit Scheme, 2012 .................................... 13 

Table 3.3—Cumulative funds released by commercial banks to clients, 2010, 2012, and 2014, ₦ billions ............................. 14 

Table 3.4—Proportion of all loans disbursed by leading commercial banks under CACS ........................................................ 14 

Table 3.5—Structure of cumulative projects financed by value chain ....................................................................................... 15 

Table 3.6—Results of estimated random-effects Tobit model for agricultural lending .............................................................. 16 

Table 3.7—Estimated elasticity coefficients of the variables in the random-effects Tobit model .............................................. 16 

Table 3.8—Commercial banks’ initial responses to NIRSAL, 2012-2013 ................................................................................. 19 

Table 3.9—Commercial banks’ loans to agrodealers during the 2013 Growth Enhancement Support scheme ...................... 20 

 

LIST OF FIGURES 

Figure 2.1—A multi-departmental approach to financing projects in the textile industry following the value chain finance 
approach ............................................................................................................................................................................ 9 

Figure 3.1—Share of key sectors in credit provided by Nigerian commercial banks, 2006-2012 ............................................. 12 



 

ii 

ABBREVIATIONS AND ACRONYMS 

ATA Agricultural Transformation Agenda 

CACS Commercial Agriculture Credit Scheme 

CBN Central Bank of Nigeria 

CRG Credit risk guarantee 

FMARD Federal Ministry of Agriculture and Rural Development 

GES Growth Enhancement Support scheme 

IDP Interest Drawback Programme 

NIRSAL Nigeria Incentive-based Risk Sharing for Agricultural Lending 



 

iii 

ABSTRACT 

Nigeria is vigorously pursuing an agricultural transformation agenda (ATA) which requires significant financial support from 

the banking sector. The success of the ATA depends on the flow of funds from banks to finance the various ATA pillars, 

especially value chain development and the flagship component, the Growth Enhancement Support (GES) scheme. This 

study (i) examines the implementation of recent agricultural finance policies and incentives associated with the Nigerian 

Incentive-based Risk Sharing System for Agricultural Lending (NIRSAL) and the stimulus funds for boosting agricultural 

lending, the Commercial Agricultural Credit Scheme (CACS), (ii) determines the impact of these financial capital interven-

tions (stimulus to the banking sector) through the instrumentality of CACS on the flow of credit to the agricultural sector, (iii) 

examines the factors militating against increased funding of agriculture by the banking sector, and (iv) articulates policies 

and strategies for improved participation of the banking sector in agricultural financing in Nigeria. The study was executed 

using data obtained from all the commercial banks in the country in a survey conducted between March and September 

2013 plus secondary data covering the period from 2006 to 2012. The study focuses on two hypotheses, namely; (i) the 

stimulus provided by the government to the banking sector to boost agricultural financing has led to significant agricultural 

credit expansion; and (ii) commercial banks have been less risk-adverse to agricultural lending due to the capital infusion to 

the banking sector by the government to stimulate agricultural lending. These hypotheses were tested using random-effects 

Tobit econometric analysis. 

There are positive trends in loan requests and in understanding of CACS implementation procedures, leading to a 

rising trend in funds release by the CBN and in loan disbursements by commercial banks. The results show that loan supply 

is higher for banks that are younger and bigger in size, and that it is significantly higher under CACS than before. These 

results imply that the financial stimulus under CACS has elicited significantly positive response from commercial banks. The 

study shows that prior to CACS rising borrower risk was associated with a higher probability of loan supply, whereas, under 

CACS, risk-taking by commercial banks has been moderated due to regulatory interventions by the CBN, including intensive 

monitoring and enforcement of operational guidelines and the imposition of sanctions against infractions. Commercial banks 

do not increase their agricultural lending due to higher leverage, greater liquidity, and wider networks of branches. They do 

so because of access to off-balance sheet resources which brightens their prospects for increased profitability and risk 

reduction. The introduction of NIRSAL in 2011 has bridged some of the policy gaps inherent in CACS. 

For improved performance from agricultural lending, there is need to re-orient the lending focus from discrete financ-

ing of separate stages of value chains to an integrated system of value chain financing. Moreover, there is need for in-

creased public spending on the development of infrastructural facilities, including agricultural storage, transportation, 

marketing, and processing facilities, so as to reduce post-harvest losses and enhance productivity. This, in turn, should lead 

to an improvement in competitiveness and repayment capacity of agricultural enterprises. Alternative sources of funds, such 

as the pension fund, accumulated funds in the CACS repayment account, and the sugar levy account, should be tapped to 

sustain CACS over the next decade. 

Keywords: commercial banks, financial stimulus, agricultural financing, lending risk 

 

 

 

 

 

 



 

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SUMMARY | APRIL 2010 

1. INTRODUCTION 

This study seeks to understand the response of the banking sector to recent agricultural finance policy initiatives in Nigeria 

with a view to articulating ways of strengthening the impact of these policies and boosting agricultural lending in the country. 

The focus is on the Commercial Agriculture Credit Scheme (CACS) and the Nigerian Incentive-based Risk Sharing for 

Agricultural Lending (NIRSAL). The CACS was created by government to contribute to the development of the agricultural 

sector through the expansion of lending to the sector by commercial banks. The Federal government decided to inject funds 

into the banking sector to induce the commercial banks to increase their lending for the development of commercial agricul-

ture. To do so, the Debt Management Office raised a seven-year bond of ₦200 billion, with the proceeds earmarked for 

lending through the scheme by approved commercial banks. This government intervention in commercial agriculture lending 

took place in 2009 when governments in the developed world were providing fiscal stimulus to their economies in response 

to the global financial crisis and economic melt-down of 2008. These largely consisted of capital infusions into the banking 

sector to revive distressed banks of various sizes. The Federal Government of Nigeria decided to make the intervention fund 

available to approved banks to provide credit facilities to commercial agricultural enterprises at single-digit interest rates. 

The CACS has been in operation effectively since 2010. The intervention initially was welcomed by the farming 

community, but was later to be confronted with controversies on account of the various restrictions associated with its 

utilization. There were restrictions in terms of the categories of beneficiaries, participating banks, and types of agribusiness 

enterprises. Representatives of small-scale farmers who approached the banks for loans were initially asked to wait until 

guidelines would be received from the CBN, but were later not provided with loans on the explanation that small-scale 

borrowers could not be accommodated under the scheme. Some state governors complained that the banks holding the 

CACS funds made it impossible for farmers to get loans, despite the efforts made by the states to access the agricultural 

credit facilities for on-lending to farmers in their states. A committee had to be set up to look at what the problems were and 

work out modalities for easy disbursement of the credit to beneficiaries. The committee, chaired by the Governor of the 

Central Bank of Nigeria (CBN), comprised six state governors and the ministers of finance and agriculture.  

In the same vein, the government initiated an agricultural finance framework known as the Nigerian Incentive-based 

Risk Sharing for Agricultural Lending (NIRSAL) system to address the problem of low level of agricultural financing in the 

country. It is focused at the pilot stage on the development of value chains in respect of six commodities – tomato, cotton, 

maize, soybean, rice and cassava. NIRSAL emphasizes lending to value chain actors and to all sizes of producers. This is in 

contrast to previous schemes which encouraged banks to lend without a clear strategy to the entire spectrum of agricultural 

value chains. Success of NIRSAL will depend on the effectiveness of its governance structure, commitment of stakeholders 

to discharge their financial responsibilities under the initiative, and political will to undertake the required sector-specific and 

fiscal policy reforms for the effective performance of the agricultural sector in general. 

Despite an enormous agricultural resource endowment, the performance of Nigerian agriculture is still below expec-

tation. Nigerian farmers are among the poorest in the society, and the agricultural sector remains highly undercapitalized. 

With meager incomes and low savings, the majority of farmers lack the equity capital for expansion of their operations and 

modernization of their enterprises. Access to debt capital is even more constrained, as many smallholders are discriminated 

against by formal financial institutions. The phobia among banks of lending to the agricultural sector remains incurable, 

despite numerous policy initiatives to remedy the situation. Commercial banks do not include agriculture in their lending 

portfolios, while existing policies and programs aimed at encouraging banks to participate in agricultural lending are not fully 

effective. How can the existing rigidity of financial institutional against agricultural lending be tackled? Why do commercial 

banks prefer to be brokers – relying on off-balance-sheet operations – in the agricultural financial system, rather than 

financial intermediators – transforming customers’ deposits into loans – for varying categories of borrowers? 

The fact that the agriculture sector, which contributes over 20 percent to the GDP of Nigeria, is not attractive to the 

banking sector should be a source of worry to policy makers and investors. This raises the question as to how the banking 

sector can improve its understanding of the performance of the agricultural sector. According to CBN data, agricultural 

lending accounted for only 1.4 percent of total bank lending as of December 2010. More often than not, the demand side of 

the problem is the focus of attention. The major arguments are that the sector is risky, loan transaction costs are high, and 

the small-scale farmers have no collateral to secure a loan. The supply side of the problem has received far less attention. 

What exactly are the limitations of the commercial banks? How can the constraints on lending to agriculture be relaxed? 

What policies and incentives will be required to encourage banks to participate in agricultural value chain financing? Specifi-

cally, what are the challenges and opportunities associated with CACS and NIRSAL in creating a win-win situation for both 



 

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SUMMARY | APRIL 2010 

lenders and borrowers? What type of financial arrangements and instruments will be suitable to ensure that small-scale 

farmers have direct access to credit under these schemes? 

The policy initiatives ─government infusion of capital for agricultural lending through the instrumentality of CACS and 

NIRSAL – are indeed justified in view of the fact that the agricultural sector has always been discriminated against by 

commercial banks over the years on account of being too risky. The resultant intervention funds are expected to increase 

bank lending and, so, may result in banks increasing the riskiness of their lending. Unless there is proper risk management, 

approval of loans for agricultural activities by the banks may not increase in accordance with the intention of the interven-

tions. Given the conflicting nature of these objectives, the question remains as to how CACS and NIRSAL might affect risk-

taking incentives relative to changes in bank lending.  

1.1 Rationale for the study 

The issue of mobilizing financial resources for the development of agriculture which is the focus of attention in this study is 

very relevant to the overall issue of financial access in the rural sector and beyond and domestic resource mobilization in 

developing countries including Nigeria which has received much attention in the literature (Claessens, 2005; Conning and 

Udry, 2005; Guha-Khasnobis and Mavrotas, 2008). Agriculture is the dominant business in Nigeria’s rural sector and its 

modernization requires substantial infusion of financial capital. Nigeria is vigorously pursuing an Agricultural Transformation 

Agenda (ATA), which assigns a leading role to the private sector, while government provides necessary support. In 2011, the 

country witnessed a major break from the past in terms of procurement and distribution of key inputs, such as fertilizer, 

seeds, and agro-chemicals. These activities are now being carried out by the private sector, thus escalating demand for 

credit in the agricultural sector. Accordingly, a new agricultural finance policy framework, NIRSAL, was put in place to ensure 

that the sector is not starved of necessary finance as the wind of transformation blows. In many ways, the success of 

NIRSAL will define the extent to which the ATA itself will succeed. An understanding of the journey so far is warranted in 

order to better understand the pathway to success and engender meaningful transformation of the agricultural sector. 

Moreover, the banking sector is part of the private sector that is supposed to lead the business processes that will 

translate the goals of ATA into reality. The banking sector must be aligned with policy makers in terms of the motivation, 

understanding, and implementation of ATA policies and projects that require financial services for achieving the desired 

results. All consumers of such services, as well as the service providers and policy makers, must play active roles in the 

implementation of the policies that guide the delivery of financial services to the agricultural sector. This is important in order 

to ensure uninterrupted flow of funds to smoothen the operations of agricultural commodity value chains. The broad goal of 

this study is to examine the response of the banking sector to the value chain financing needs of farmers within the frame-

work of the ATA in Nigeria. The study seeks to achieve four objectives 

1. Examine the implementation of recent agricultural finance policies and incentives associated with NIRSAL and the 

stimulus funds for boosting agricultural lending through CACS, 

2. Determine the impact of the financial capital intervention (stimulus to the banking sector) through the instrumentality 

of CACS on the flow of credit to the agricultural sector,  

3. Examine the factors militating against increased funding of agriculture by the banking sector, and 

4. Articulate policies and strategies for improved participation of the banking sector in agricultural financing in Nigeria. 

 

1.2 Methodology 

The focus of the study is to determine whether and how the financial stimulus affected risk taking in credit and investment 

activities of commercial banks in Nigeria. With regard to CACS, the analysis will involve two sub-periods – pre-stimulus 

(2006-2008) and post-stimulus (2009-2012). Both commercial banks participating in CACS and non-participating banks are 

included in the study. As regards NIRSAL, all the commercial banks will be covered for the purpose of understanding their 

concerns, perspectives, involvement, and lending procedures under the scheme. 

Data were collected from all commercial banks. Policy-related data were obtained from CBN, the Federal Ministry of 

Finance, and the Federal Ministry of Agriculture and Rural Development. The two types of data collected from the commer-

cial banks covered the period from 2006 to 2012. Data collected with respect to CACS and NIRSAL included the amount of 

CACS capital received, when it was received, when credit disbursement began, CACS credit disbursed by type of business, 

the number of CACS agricultural credit applications received and approved, interest rates, capital adequacy, asset quality, 



 

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SUMMARY | APRIL 2010 

age of bank, earnings, liquid assets, liquid liabilities, total loans, non-performing loans, total deposits, bank size (total 

assets), bank total equity capital, number of bank branches, presence of an agricultural desk in the bank, and the number of 

staff in agricultural finance department. Qualitative data were obtained from all commercial banks using open-ended re-

search instruments. This aspect of the data collection exercise involved visits to the headquarters of the banks and discus-

sions with key officials. The key questions posed to officials of each bank were: 

1. Is the bank is increasing credit supply to agriculture due to government incentives since 2009? Why or why not? 

2. What do they like and dislike about CACS and NIRSAL? 

3. What are the specific constraints facing the bank in responding to the agricultural finance policy incentives under 

CACS and NIRSAL?  

4. What has the bank done specifically in response to the various incentives provided under NIRSAL? 

5. What efforts has the bank made to align with the concept of value chain financing in agriculture?  

6. What policies and incentives are necessary to encourage banks to participate in agricultural value chain financing? 

7. What steps can the banking sector take to improve lending to agriculture and, by so doing, contribute to the success 

of the Agricultural Transformation Agenda in the country?  

8. What innovations in the area of agricultural value chain financing can the bank can introduce to the financial system? 

The study focuses on two hypotheses, namely; (i) the stimulus provided by the government to the banking sector to 

boost agricultural financing has led to significant agricultural credit expansion; and (ii) commercial banks have been less risk-

adverse to agricultural lending due to the capital infusion to the banking sector by the government to stimulate agricultural 

lending.  

However, to the extent that banks were subject to government regulations, these regulations might reduce rather 

than increase risk taking. Besides, the efficiency of the banking system can have a profound impact on real resource and 

investment allocation, not only directly, by reducing the amount of resources channeled into the credit market, but also 

indirectly, by affecting entrepreneurs' investment decisions. In a credit market distorted by information asymmetries, financial 

intermediaries often react by credit rationing firms; such that loan requests are frequently rejected or only partially satisfied. 

On this basis, one can reasonably argue that if the probability of credit rationing is very high, and applying for a loan is costly, 

entrepreneurs might ex ante find it optimal not to seek external financial resources and to stay out of the financial market. 

This occurs when other investment opportunities, which do not require access to credit, are also available (Capasso and 

Mavrotas, 2010). Earlier studies underscore the importance of bank capital for credit origination (Thakor, 1996). While 

previous research shows that a negative shock to bank capital forces a cut in lending (Berger and Bouwman, 2013), others 

suggest an asymmetric response of financial institutions to capital shocks. In particular, Duchin and Sosyura (2012) find that 

a positive shock to capital need not result in credit expansion, but instead may lead to a shift in credit rationing and an 

increase in risky investments. It is instructive to ascertain in the case of Nigeria the direction of the impact of injection of 

capital funds by the government. 

DETERMINING THE EFFECTS OF STIMULUS ON AGRICULTURAL LENDING 

The effect of government intervention on commercial agriculture lending is examined by focusing on the response of the 

commercial banks to financial infusions into the banking sector under CACS. The estimated model of this response is 

specified implicitly as follows: 

yi,t = α + xi,tβ + εi,t (1) 

In this time-series-cross-section formulation, y is the value of loans supplied by commercial banks which are the 

cross-sectional units; i refers to a bank, while t refers to time expressed in years from 2006 to 2012. β is the parameter to be 

estimated, and εi,t is the error term. For the purpose of the analysis, the period from 2006 to 2008 is regarded as pre-

stimulus, while the period from 2009 to 2012 is regarded as the post-stimulus period. The essence is to determine whether 

there is a significant change in the supply of credit to the agricultural sector by commercial banks across the two periods due 

to the injection of funds by the governmental to boost agricultural financing. To take advantage of the stimulus, the banks 

themselves have to be in good standing to engage in financial intermediation. This underscores the need to consider key 



 

4 

SUMMARY | APRIL 2010 

performance variables of the bank to lend to agribusiness firms across the country. Thus, to capture the effect of the stimu-

lus, some bank characteristics that may influence the bank’s lending are considered, such as size (total assets) and proxies 

for key measures of banks’ financial condition and performance used by banking regulators, such as capital ratio and 

liquidity ratio. The estimated equation is specified as follows. 

 𝑦𝑖𝑡  = 𝛼𝑖 + 𝛽1𝑖𝑟𝑖𝑡
+ 𝛽2𝐶𝐴𝐶𝑆𝑖𝑡  + 𝛽3𝑙𝑜𝑎𝑛𝑟𝑖𝑠𝑘𝑖𝑡 +  𝛽4𝐶𝐴𝐶𝑆 ∗ 𝑙𝑜𝑎𝑛𝑟𝑖𝑠𝑘𝑖𝑡 +  𝛽5𝑐𝑎𝑝𝑟𝑎𝑡𝑖𝑜𝑖𝑡  +  𝛽6𝑙𝑖𝑞𝑟𝑎𝑡𝑖𝑜𝑖𝑡  +  𝛽7𝑡𝑎𝑠𝑠𝑒𝑡𝑠𝑖𝑡  +

 𝛽8𝑏𝑟𝑎𝑛𝑐ℎ𝑖𝑡  +  𝛽9𝑏𝑎𝑛𝑘𝑎𝑔𝑒𝑖𝑡  +  𝜀𝑖,𝑡  (2) 

Where, yit is the total value of loans granted to agricultural enterprises by a commercial bank in a particular year, ir is 

the (lending) interest rate, CACS refers to the stimulus to the banking sector through government’s capital injection under 

CACS with a value of unity from 2009 to 2012 and zero from 2006 to 2008, capratio is the capital ratio of the bank (ratio of 

equity capital to total assets) liqratio is the liquidity ratio (ratio of liquid assets to total assets), branch refers to the number of 

branches of a commercial bank, bankage is the age of the commercial bank, tassets refers to a bank’s total assets, and 

loanrisk refers to the loan-to-income ratio (for a borrower), which is used as a proxy for borrowers’ risk, while εi,t is the 

stochastic disturbance term of the regression.  

In testing the specified hypotheses, the significance of the coefficients β2, β3, and β4 are particularly crucial. Com-

mercial banks’ disposition to the stimulus policy is analyzed by including an interaction term CACS*loanrisk in the model. 

The significance of the coefficients will enable us capture the effect of the stimulus policy on agricultural lending by commer-

cial banks. The direction of the effect depends on whether the banks tend to be more risk-taking in view of the fact that they 

have access to off-balance sheet resources to support their lending to agriculture. If this is the case, the sign of the estimat-

ed coefficient will be positive. Alternatively, they may refrain from making risky investments in accordance with the opera-

tional guidelines of the regulatory authority. In this case, a negative sign is expected. It is expected that lending will decline 

as borrowers become more risky, thus the sign of the estimated coefficient of loanrisk is expected to be negative. The signs 

of the coefficients of capratio, liqratio, tassets, branch, and bankage are expected to be positive since bigger, older and more 

liquid banks with wider network of branches should have greater capacity to lend to agriculture than otherwise would be the 

case. Bigger banks (banks with larger total assets) tend to have greater capacity to generate loanable funds, meet larger 

loan requests, have more personnel with specialization in agricultural lending, and are better able to carry out extensive 

agricultural credit transactions compared with those with low level of total assets.  

Although bank capital has a role to play in reducing risk, the direction of the effect of capital ratio is ambiguous. Ac-

cording to Koch (1988) it provides a cushion for firms to absorb losses and remain solvent. It also provides ready access to 

financial markets and guards against liquidity problems caused by deposit outflows. With high capital ratios, banks are better 

placed to take on risky investments by, for example, investing more in loans than in safe assets. The large equity base of 

such banks will serve as a cushion against large loan losses. However, on the other hand, a highly capitalized bank may 

decide to invest in safer assets such as government securities, thus crowding loan requests by the private sector. Besides, a 

less capitalized bank may decide to follow a similar investment pattern of investing more in loans than safe assets in order to 

increase expected profits even though at a greater risk (Betubiza and Leatham, 1995).  

In view of the nature of the data (limited observations and limited time covered) and the peculiar characteristics of 

the banks, the model cannot be estimated by pooled ordinary least squares technique (POLS). Some of the seventeen 

commercial banks included in the analysis did not grant any loans in some of the years covered in the study (2006 to 2012); 

thus the dependent variable takes on the value of zero during those years. With the small size of the sample, eliminating 

those banks to circumvent the problem of limited dependent variable is inadvisable as it will undermine the degrees of 

freedom and, more importantly, create sample selection bias. Rather than excluding those banks with zero response for the 

amount of originated credit, a random-effects Tobit analysis is employed to account for the censored nature of the data and 

to adequately characterize the full range of commercial banks’ behavior during the period covered in the study. 

2. LENDING TO THE AGRICULTURAL SECTOR BY COMMERCIAL BANKS 

IN NIGERIA: CHALLENGES AND OPPORTUNITIES 

This section examines the various constraints on bank lending to agriculture in Nigeria and the emerging opportunities to 

reverse the trend. The analysis is based on the commercial banks’ perspectives and proposals. The generally discriminatory 

attitude of the banks to agriculture is considered as are the challenges they face with regard to CACS and NIRSAL. 



 

5 

SUMMARY | APRIL 2010 

2.1 Factors discouraging agricultural lending 

The agricultural sector has not been accorded priority by commercial banks in their lending activities over the years. Thus, 

financial constraints are more pervasive in agriculture than in many other sectors. According to Olomola and Gyimah-

Brempong (2014), these constraints derive from policy failures and institutional weaknesses, supply and demand-side 

bottlenecks, stringent terms and conditions of financial products, and market failures. 

The agricultural sector has been poorly served by the financial system partly on account of the unfavorable policy 

environment. Over the years, the enabling environment for efficient operation of the financial system has been lacking. Until 

recently, the economy has been characterized by weak regulatory regimes, poor physical and financial infrastructure, and 

policies that repress financial market development. To date, it is expensive to provide financial services in rural areas which 

is the domain for agricultural activities. Rural areas in Nigeria are typically less dense in economic activity, have poorer 

infrastructure, and are more subject to risks from weather and agricultural price volatility than urban areas. Financial institu-

tions generally have weak institutional capacity for providing financial services in rural areas. Moreover, operators within the 

financial sector often display limited understanding of the agriculture sector. This taints their perceptions of the level of risks 

involved in financing the sector. 

Moreover, debt capital is not flowing into the agricultural sector as expected due to obstacles faced by lenders and 

borrowers. Borrowers in the agriculture sector lack personal capital with very limited cash flow, and their credit histories are 

poor or are insufficient to secure loans. They lack business plans and the ability to project realistic cash flow. Access to 

market for many agricultural producers in Nigeria is poor and their linkages to other value chain actors is weak. Financial 

management experience within the sector is limited. Inadequate and poor record keeping is also a challenge. As regards the 

lenders, the main problem is their unwillingness to venture outside of their specialty areas of lending. Other constraints 

include lower staffing levels with fewer staff having expertise in agriculture; especially in rural areas. The credit market 

serving agriculture is also encumbered by stringent loan terms and conditions set by financial institutions, including high 

interest rates and transaction costs. Other constraints include inappropriate financial products and services and inadequate 

capacity to deliver requisite services. 

An evidence of market failure in the financial sector has been that private banks have failed to provide appropriate 

credit and financial services to small, family farms and to rural areas in general. The agricultural credit market is beset by 

several imperfections including market segmentation, covariate risk, scarcity of collateral, information asymmetry, and mass 

illiteracy of clients. The widespread information asymmetry often leads to problems of adverse selection and moral hazard. 

These problems underpin the reluctance of commercial banks to lend to small-scale farmers (Olomola, 1996, 1999). Adverse 

selection arises when the lenders do not have sufficient information on particular characteristics of borrowers, especially in 

terms of a borrower’s preferences for undertaking risky projects. In the case of moral hazard, the main problem is that 

borrowers’ actions are not discernible by lenders. This heightens the risk of default, in that individual borrowers may be lax in 

making efforts to make the project successful or they may change the type of project that they undertake. 

Despite the recent policy incentives enshrined in NIRSAL, the attitude of commercial banks to agricultural lending 

has not changed remarkably. They still complain that credit requests received from clients are not properly packaged into 

bankable proposals. According to officials of a bank, “a large number of smallholder farmers are unbankable. Yet this group 

makes up the highest number of players in the industry. This is a key problem because the bank recognizes the importance 

of primary producers in the sector as key to driving the sector”. The commercial banks express other discouraging aspects of 

the borrowers’ characteristics as follows.  

Most facility requests emanate from individual borrowers who have no means of securing their loans. 

Another problem is the inability of borrowers to provide the required documentation as stipulated by CBN. 

The default risk is still borne 100 percent by the bank; and there is the lack of requisite skill sets and ad-

equate staff to drive agricultural business. 

Farmers are presently not using best global practices, and there is limited commercial farming taking 

place. There is also limited historical information available on past performance. Most clients do not 

maintain proper records. 

There is lack of acceptable warehouses. Most borrowers do not maintain records. A number of clients do 

not have bank accounts. Borrowers are unable to raise the required equity contribution. 



 

6 

SUMMARY | APRIL 2010 

Despite these constraints, banks are participating in the recent agricultural finance initiatives. They also are making 

efforts to build necessary skills within their staff to serve the agricultural sector. According to one of the banks, “we are rolling 

out an aggressive training program to increase agricultural finance skills, not only for the agricultural finance officers, but also 

for other marketing staff in the bank”. 

2.2 Challenges of the recent agricultural finance incentives 

COMMERCIAL AGRICULTURE CREDIT SCHEME (CACS) IMPLEMENTATION CHALLENGES 

Despite its attraction to medium and large-scale enterprises, CACS has encountered administrative and operational chal-

lenges from lenders, borrowers, and regulatory authorities. The required skills for administering agricultural loans are missing 

in many of the banks. Some of them have had to tread carefully to minimize losses that may arise due to poor loan repay-

ment. According to officials of one of the banks: 

“Under CACS, we were careful due to poor loans we had previously with agriculture-related borrowers. 

We had challenges understanding how properly to deal with agricultural lending and to mitigate repay-

ment risks. When we were better placed to deal with these challenges, however, the funds were ex-

hausted, and we did not receive disbursements for all requests made. 

Disagreements between the banks and CBN over some operational details discouraged some banks from intensive-

ly implementing the CACS scheme. Delays in reviewing transactions submitted to CBN have exacerbated the situation. 

According to some bank officials, “Staff of the development finance department were rigid in the interpretation of the guide-

lines; often insisting that certain standard credit clauses (especially default clauses) be removed from offer letters”. The fact 

that CBN has to repeat the due diligence activities that already had been done by the banks in some instances was also a 

major cause of delay in releasing funds. While some banks were not satisfied with the style of rule enforcement of CBN, 

others seemed not to be on a familiar ground as far as agricultural lending is concerned. In such cases, the onus is on the 

regulator to ensure that the guidelines are followed to the letter to minimize borrowers’ risk and maximize loan repayment. 

Many of the commercial banks sidetracked the guidelines and faced CBN sanctions from time to time. CBN had to 

strive to change a perception of many borrowers and the public in general that CACS is a form of government largess to be 

accessed under the guise of agriculture but then could be diverted to other uses with a slim chance of being repaid. The 

central bank, therefore, has designed elaborate procedures for due diligence in lending transactions and for monitoring loan 

utilization. Some of the banks expressed concern about urban bias and a tilt of CACS towards large-scale agribusiness 

firms. By the way CACS was designed; it was difficult for many Nigerian firms to meet the requirements for accessing the 

loans; with the result that most of the beneficiaries have been foreign companies. Moreover, the credit limits discriminated 

against the small-scale farmers and favored large-scale farmers, who ordinarily are less constrained than smaller farmers in 

accessing financing. 

NIGERIA INCENTIVE-BASED RISK SHARING FOR AGRICULTURAL LENDING (NIRSAL) 

IMPLEMENTATION CHALLENGES 

The response of the commercial banks to NIRSAL incentives was sluggish. A general feeling that the government was 

unlikely to implement the policies in a consistent and stable manner underpinned the initial hesitation of the banks to partici-

pate in agricultural lending under NIRSAL. There had been concerns about the equity contribution of the borrower. This was 

initially put at a maximum of 20 percent. In addition, the NIRSAL scheme required that clients fulfill all of the basic loan 

conditions. Also the borrowers were required to pay a credit risk guarantee (CRG) of 3.0 percent, which was an unwelcome 

cost. Bank officials stated that: 

Our biggest constraint under NIRSAL is its bureaucratic nature resulting in very slow turn-around time for 

processing credit requests. In addition, NIRSAL's CRG pricing formula for credits differs from the under-

standing provided by the NIRSAL guidelines. The guidelines state that the CRG premium is chargeable 

on the outstanding portion of the guaranteed facility. However, NIRSAL claims that the initial CRG premi-

um is payable on the full facility amount. …By NIRSAL’s agreement, CRGs, if approved, will be issued 

within 10 working days. But, we have instances where a CRG is delayed for over one month. The reason 

given is that a particular officer is not available to sign. 



 

7 

SUMMARY | APRIL 2010 

According to the banks, most borrowers find the 3.0 percent guarantee fee to be on the high side. The fee consti-

tutes an additional cost to the customers, hence some of them decline loan offers. Another factor influencing the participation 

of banks is the unavailability of bankable project proposals. Many of the proposals submitted for financing under the NIRSAL 

scheme hardly meet the lending criteria stipulated by some banks. In addition, there are challenges on the part of NIRSAL. 

The main challenges include the difficulty in validating the information provided by counter-parties for the purpose of credit 

risk guarantee; a general lack of information technology infrastructure in respect of movement of information to the NIRSAL 

head office, and manpower shortage. 

These challenges are not insurmountable. As lending opportunities emerge, it is in the interest of all stakeholders to 

ensure that the lending conditions are fine-tuned to improve the situation. There is a need for timeliness in loan transactions, 

due diligence procedures, and in acceding to CRG requests by banks. There should be clarity in the terms and conditions 

guiding the classification of the value chains for the purpose of credit risk coverage and IDB payments. The commercial 

banks and the regulators also need to strike an appropriate deal regarding critical issues. These include retaining losses on 

non-performing accounts until the end of the financial year before redemption of credit risk guarantees, and limiting the 

guarantee cover to the amount in default after all other securities have been realized so as not to leave the banks with a net 

loss in terminal default situations. 

2.3 Emerging opportunities for lending to agriculture  

The policy initiatives to boost agricultural lending in Nigeria received regulatory impetus in 2010 when CBN issued a circular 

making it mandatory for commercial banks to establish agricultural desks to handle transactions relating to agricultural 

financing. Prior to this, very few banks had special units for agricultural finance purposes, so that internal capacity for 

developing innovative products in support of agriculture had been underdeveloped. Compliance with this regulation is 

spreading gradually within the banking sector, but deployment of competent personnel to cope with agricultural loan demand 

and regulatory requirements by CBN is not still being accorded priority attention. There is need for the banks to ensure that 

personnel on the newly established agricultural desks are adequately trained to bridge existing knowledge gaps. Commercial 

banks should be more proactive in designing measures to reach prospective agricultural customers. The banks can contrib-

ute to the success of the ATA by creating incentives for agricultural customers. At the grassroots level, the banks could take 

it upon themselves to educate farmers and popularize agricultural financing in rural areas. 

RECOGNITION OF BANKS’ TRAINING NEEDS 

With the expansion of investment under the ATA, there is increasing recognition of agriculture as a viable sector of the 

Nigerian economy. Banks are beginning to recognize their need to develop skills in agricultural (value chain) financing – 

financial analysis, risk analysis, and risk management of agricultural enterprises – in order to engage the sector effectively. A 

number of banks are also making efforts to train relevant front office staff to understand all aspects of agriculture, lending 

risks, financing needs and financing cycles, and farm budgets. Some banks already are training credit analysts in agricultural 

value chain financing in order to improve their ability to properly asses and review agricultural credit proposals quite apart 

from other regular credit transactions. One bank reported that “we are organizing capacity building for farmers and other 

players in agriculture value chains. We provided capacity building to farmers in the areas of farm records keeping and 

bookkeeping. We are also creating new agricultural finance products. We are working to amend our existing products to suit 

agricultural enterprises such as our stock financing, assets acquisition for mechanization, and so forth.” 

VALUE CHAIN FINANCE 

Value chain finance has been defined as financial products flowing to value chain actors to address and alleviate driving 

constraints to growth in the value chain (Fries, 2007). According to Miller and da Silva (2007), a value chain consists of the 

set of actors (private and public, and including service providers) and the sequence of value-adding activities involved in 

bringing a product from production to the final consumer. In agriculture they can be thought of as a “farm to fork” set of 

inputs, processes, and flows. Miller (2011) makes a distinction between conventional agricultural financing and agricultural 

value chain finance. The latter refers to any or all of the financial services, products, and support services flowing to or 

through a value chain to address the needs and constraints of those involved in that chain, be it a need for finance, a need to 

secure sales, procure products, reduce risk, or improve efficiency within the chain. Agricultural value chain finance can be 

internal – such as when an input supplier provides credit to a farmer or when a lead firm advances funds to a market 

intermediary – or external when it involves value chain relationships and mechanisms – for example, when a bank issues a 

loan to farmers based on a contract with a trusted buyer or a warehouse receipt from a recognized storage facility. This 



 

8 

SUMMARY | APRIL 2010 

definition stresses that value chain finance does not include conventional agricultural financing from financial institutions, 

such as banks and credit unions, to actors in a chain unless value chain relationships are expressly integrated. 

Value chain finance, especially the financing of contract farming and out grower schemes, is attractive to banks. Ac-

cording to AFD (2012), there are four ways in which value chain financing can stimulate banks’ interest in lending to agricul-

ture.  

1. Ready market and distribution channel for farmers’ products. The close relationship between farmers and buyers is 

an important element of loan security. The mere fact of being in the value chain tends to boost farmers’ creditworthi-

ness.  

2. The technical advice provided to farmers under contract farming arrangements mitigates harvest failure and im-

proves the quality of outputs. This reduces risks to both borrowers and lenders. 

3. Reduction in loan transaction costs. There are several dimensions to this. Lower appraisal and monitoring costs are 

based on the participation of value chain partners in the loan administration. Much lower loan disbursement and re-

covery costs result from lenders dealing with only a few value chain partners. The partners facilitate or directly dis-

tribute loans to farmers. Finally, loan recovery costs are reduced since value chain partners can provide part of the 

credit in kind to avoid loan diversion to other purposes.  

4. Banks can rely on value chain partners’ creditworthiness and credibility as collateral options. These partners can 

serve as guarantors for farmers to enable them to have access to loan. 

Despite the advantages however, there are downsides. These include side-selling by partners outside the contractu-

al obligations and willful loan default. There remains a need for intensive monitoring of activities and regulatory interventions 

to ensure that all parties in value chain financing arrangements play by the rules. The effectiveness of financing mechanisms 

will also depend on an enabling legal environment to prevent unfair price determination, unfair treatment of farmers, and 

flexible property rights to provide for the use of fixed and non-fixed assets as collateral. 

Efforts made by banks to align with the concept of value chain financing 
Banks are imbibing the value chain finance approach to agricultural lending. Some have engaged various clients that 

operate in agricultural value chain informing them of the government agricultural financing initiatives and how they might 

benefit. According to some bank officials: 

“We have focused on value chains and targets and are making efforts to have specific value chain fi-

nancing products unique to each one. We have a clear understanding of the value chain concept and are 

developing training content for our credit analysis team, as well as legal and other partners, on same”. 

The banks that are already adopting a value chain approach in other business sectors appear to be familiar with the 

concept such that adopting the value chain approach to agriculture is a normal course of business for them. Some have 

evolved credit policies which stipulate that they can only finance production activities if there are clear buyers of the prod-

ucts. This is being followed as a guiding principle for agricultural lending. A number of specialized products have already 

been developed and are being targeted at various operators in agricultural value chains. These include financing of industrial 

end-users and of out growers schemes in which the banks are supporting the financing of input procurement, primary 

production, marketing, and processing. 

Financial innovations for agricultural value chain financing 
The emerging initiatives in agricultural value chain financing are exemplified by the experiences of some of the banks. For 

instance, Access Bank is developing a value-chain management system that is inclusive of all players in the value chain. 

The bank is working with microfinance organizations for on-lending to small-scale farmers. These microfinance partners 

ensure proper disbursement, monitor the use of the funds by farmers, and assist in recovery, where necessary. This innova-

tion is also contributing to capacity building for extension officers to ensure proper monitoring and evaluation. These activi-

ties are achieved through the provision of grants from Citi Foundation to ensure financial inclusion of the famers. These 

efforts are being piloted with farmers in Kano, with plans to replicate the program elsewhere in the country. 

Another area where the banks are developing interest and expertise is in the use of warehouse receipt financing for 

lending in the agricultural sector – in particular, Stanbic IBTC Bank.  



 

9 

SUMMARY | APRIL 2010 

Figure 2.1—A multi-departmental approach to financing projects in the textile industry following the value chain 

finance approach 

 

Union Bank is adopting a multi-departmental approach in financing projects in the textile industry following the value 

chain finance approach. The innovation involves a partnership arrangement with a development bank as illustrated in Figure 

2.1. The collaborative effort is between the Agricultural department of Union Bank (UBN) and the Credit and Business Group 

(CBG) which is responsible for large scale commercial farming and processing. The bank provides finance on two platforms 

– primary production (farmers) and industrial production (the processors). Other actors along the value chain, such as off-

takers (buyers), packaging service providers, manufacturers, and marketers, can also be financed. 

THE GROWTH ENHANCEMENT SUPPORT (GES) SCHEME FINANCING OPPORTUNITIES 

Since the inception of the ATA in 2011, markets for the supply of agricultural inputs (seeds, fertilizers, crop protection 

products, farm implements and machines, etc.) have been completely liberalized. Thus, the production, procurement, and 

distribution of inputs has been left in the hands of the private sector operators. At the same time, the subsidy on fertilizers 

has been increased from 25 percent to 50 percent. In order to ensure that farmers directly benefit from the subsidy and have 

unrestricted access to the private-sector supplied inputs, the federal government initiated the Growth Enhancement Support 

(GES) scheme, through which input subsidies are channeled to small-scale farmers across the country through an electronic 

wallet system. With unique voucher numbers that are delivered to their phones, farmers redeem their input subsidy allocation 

from accredited agrodealers. It is expected that this scheme will improve agricultural input distribution and marketing. In 

addition, it should provide incentives to encourage actors along the fertilizer value chain to work together towards the 

common purpose of improving agricultural productivity, household food security, and incomes. The specific policy objectives 

of the GES are to:  

1. Target 5 million farmers annually for 4 years for the delivery of agricultural inputs on their mobile phones; 

2. Provide direct support to farmers to enable them to procure agricultural inputs at affordable prices, at the right time, 

and at the right place; 

3. Increase productivity of farmers across country through increased use of fertilizer—increasing application rates from 

13kg/ha to 50kg/ha; and 

4. Transform the role of government from direct procurement and distribution of fertilizer to a facilitator of procurement, 

a regulator of fertilizer quality, and a catalyst of active private sector participation in the fertilizer value chain.  

At the inception of the GES in 2012, the input subsidy rates were 100 percent for seeds (rice and maize) and 50 per-

cent for other inputs such as fertilizer, veterinary inputs (vaccines, medicines), breeding stock (chicken, pigs, cattle), and 

fishery inputs (outboard engines, nets, water testing kits, fingerlings, and feed).  

Agrodealers and input suppliers have a role to play in the procurement and distribution of these inputs to the farm-

ers, while commercial banks are expected to provide the required financing. Many of the commercial banks did not respond 

favorably to this GSS-related financing opportunity in 2012, demonstrating, rather, their usual pessimism about agricultural 



 

10 

SUMMARY | APRIL 2010 

lending and distrust of government in ensuring effective implementation of policy incentives. The situation however, im-

proved subsequently as government expedited actions on the implementation of NIRSAL. In 2013, NIRSAL acted as the 

transaction adviser to FMARD on the ₦60 billion GES financing, for which global borrowing terms were negotiated with 

banks on behalf of agrodealers across the country. The key terms of the transactions included: borrower equity contribution 

of 10 percent, NIRSAL credit guarantee of 75 percent (inclusive of principal and interest accrued therein), maximum interest 

rate of 18 percent (including NIRSAL fees of 1.00 percent). Part of the negotiated lending incentives were that collateral 

should be limited to warehouse inventory or warehouse receipts, which should be monitored by supply chain managers 

under the GES. The loan period was scheduled to coincide with the duration of the planting season. For instance, for the wet 

season input supply, the loan issued in March should be fully repaid by September. Another incentive is the provision of a 50 

percent interest rate subsidy to be applied on the actual interest paid by agrodealers participating in the GES scheme. 

3. ANALYSIS OF COMMERCIAL BANKS’ RESPONSE TO GOVERNMENT’S 

FINANCIAL STIMULUS FOR AGRICULTURAL LENDING 

The injection by government of capital into the banking sector through CACS in 2009 and the introduction of NIRSAL in 2011 

represent the most fundamental policy initiatives by the Nigerian government to encourage commercial banks to expand 

inflows of credit to the agricultural sector. This section examines the design and implementation of CACS, through which the 

financial stimulus was provided to the banking sector, and that of NIRSAL, through which incentives were provide to address 

agricultural lending risks. The performance of these initiatives and the response of commercial banks are also analyzed. 

3.1 Design and Implementation of the Commercial Agriculture Credit Scheme 

As part of its developmental role, CBN, in collaboration with FMARD, established CACS in 2009 to provide finance for the 

country’s agricultural value chains (production, processing, storage, and marketing of agricultural commodities). Increased 

production arising from the intervention were expected to moderate inflationary pressures and assist the Central Bank to 

achieve its goal of price stability in the country. The primary objectives of CACS are to  

1. Fast-track the development of the agricultural sector of the Nigerian economy by providing credit facilities to large-

scale commercial farmers at single digit interest rates, 

2. Enhance national food security by increasing food supply and effecting lower agricultural produce prices, thereby 

promoting low food inflation,  

3. Reduce the cost of credit in agricultural production to enable farmers exploit the untapped potentials of the sector, 

and 

4. Increase output, generate employment, diversify Nigeria’s revenue base, raise the level of foreign exchange earn-

ings, and provide inputs for manufacturing and processing on a sustainable basis.  

The scheme, which is a sub-component of the federal government’s Commercial Agriculture Development Program, 

is financed through a ₦200 billion bond raised by the Debt Management Office. Loans to eligible entities under CACS are 

disbursed at a maximum interest of 9 percent. The costs of the subsidy arising on all loans granted at this stipulated rate 

relative to prevailing interest rates on commercial credit and the administrative expenses of the scheme are borne by CBN. 

The Central Bank and FMARD jointly ensure that the scheme is implemented successfully through a Project Steering 

Committee, chaired by the Minister of Agriculture, whose members include the Governor of CBN, a representative of the 

Federal Ministry of Finance, a representative of commercial farmers, and the Programme Coordinator of the Commercial 

Agriculture Development Programme. The day-to-day implementation of CACS is undertaken by a Technical Implementation 

Committee, that is chaired by the Director of the Development Finance Department at CBN.  

CACS operated through the allocation of two tranches of ₦100 billion each. The first ran from May to December 

2009, while the second tranche commenced in February 2010. By 2012, 19 commercial banks were participating in CACS. 

Nonetheless, the disbursement of the funds has lagged; implying that repayment may even drag beyond the expected time 

frame for the scheme. 

Lending under CACS covers key stages of the agricultural value chain beginning from the supply of farm inputs to 

the production of tree and arable crops, livestock, and aquaculture. It also covers processing such as feed mills develop-

ment, threshing, and other forms of transmutation for value addition, as well as the storage of commodities and inputs, and 



 

11 

SUMMARY | APRIL 2010 

the marketing of agricultural commodities. The guidelines issued for the operation of the scheme define two types of com-

mercial agricultural enterprises. First, any farm or agro-based enterprise with agricultural assets (excluding land) of not less 

than ₦100 million are considered large-scale commercial enterprises. To qualify for financing under CACS, such enterprises 

should demonstrate prospects of growing their assets to ₦250 million within the next three years. Secondly, medium-scale 

commercial enterprises have at least ₦50 million in assets and, in order to qualify for support under the scheme, should 

show prospect to grow to ₦150 million in the next three years. Against loans provided with a maximum interest rate of 9 

percent, participating banks are to request from borrowers acceptable collaterals in line with their banking operations. The 

loans have a maximum duration of seven years with a moratorium period on repayment based on the gestation period of the 

enterprise. There is also provision for working capital facility of one year which can be rolled over as the need arises. 

According to its original design, CACS was to last for a period of seven years; but the terminal date was extended in 2014 

from 2016 to 2025 by the committee of governors of the CBN. 

RESPONSE OF BANKS TO CACS INITIATIVE 

Commercial banks are positively disposed to the incentives provided under CACS and are willing to explore the opportunities 

it opens up to them. CACS is a source of additional income for the banks and affords them the opportunity to actively 

participate in the ATA in promoting commercial agriculture enterprises in the country. CACS is an initiative that affords the 

banks an opportunity to offer customers in the agricultural low interest loans, while not putting pressure on the bank’s 

balance sheet. This helps improve their liquidity. The scheme provides long-term funding to enable banks to offer loans on 

seven-year terms to support agricultural infrastructural development and the acquisition of agricultural capital items. The 

focus of the scheme is on medium and large-scale agricultural enterprises which have the capacity to borrow from banks and 

where are organized to employ good management practices to efficiently utilize the funds. The agricultural enterprises are in 

a position to comply with collateral and other requirements of the banks. Furthermore, the low interest rates makes it 

attractive to the agricultural enterprises. Borrowing under the scheme is a cheaper option for the targeted enterprises than 

seeking financing through other channels. This is also of interest to the banks since, due to CACS, their clients operate with 

lower costs and higher returns and, in consequence, are empowered to meet their repayment obligations. 

The banks have shown favorable responses to CACS by increasing their lending to agriculture since CBN launched 

the scheme. In general, the banks stated five reasons for why the scheme has proved successful. 

1. Transparent process. The implementation of the scheme has been directed at the real players in the agricultural sec-

tor in line with the guidelines of the scheme. Open release of the CACS implementation guidelines to commercial 

banks by the CBN has been helpful in bridging communication gaps and generating better understanding of the 

scheme among stakeholders.  

2. Timeliness of operations. Although some banks complain about delays in processing loan applications, others feel 

that the operation and turn-around-time for credit processing and disbursement by CBN officials have been encour-

aging and contributed to the scheme’s success. 

3. Rule enforcement. The guidelines of the scheme provide clear instructions on the loan application, disbursement, 

monitoring, and collection processes. CBN enforces strict compliance with the implementation guidelines. Many of 

the commercial banks judged the strict adherence by CBN to auditing, monitoring, and evaluating the enterprises of 

the borrowers as highly commendable.  

4. Effective monitoring. The emphasis on verification and monitoring of the projects benefiting under CACS is particu-

larly considered to be a very good initiative. 

5. Adequate funding. The provision of liquidity to fund lending at interest rates of 9 percent is attractive to both the 

banks and the scheme’s beneficiaries. Overall, the ability of CBN to absorb the subsidy on the interest rate under 

CACS is an overarching source of attraction to the scheme by participating banks. 

PERFORMANCE OF CACS 

Data from CBN show that by the end of 2012 a sum of ₦199 billion has been disbursed for 269 projects. These consisted of 

239 private and 30 state government projects. Under CACS, each state government can borrow up to ₦1.0 billion for on-

lending to small-scale farmers. To date, however, not all the states have considered it necessary to take advantage of this 

provision of the scheme. Nonetheless, the overall impact of the scheme on the flow of credit from commercial banks to 

agriculture is likely to be positive, especially judging by the rising trend in the share of agriculture in commercial banks’ 

overall credit portfolios by key sectors of the economy (Fig. 3.1). The share of agriculture rose from 1.4 percent in 2009 to 



 

12 

SUMMARY | APRIL 2010 

3.9 percent in 2012. This positive trend is not due to CACS alone, but, according to Olomola and Gyimah-Brempong (2014), 

is a reflection of all agricultural credit intervention schemes and government incentives to lenders. These schemes include 

the Agricultural Credit Guarantee Scheme, the Self-Help Group Linkage Banking, the Trust Fund Model to Enhance Agricul-

tural Credit Supply, the Interest-rate Drawback Programme (IDP), and the Agricultural Credit Support Scheme (ACSS), all 

introduced at different periods by CBN. 

Figure 3.1—Share of key sectors in credit provided by Nigerian commercial banks, 2006-2012 

 

Table 3.1—Loan application rejection rates under the Commercial Agriculture Credit Scheme, 2010 

Banks 

Private State 

Number 
submitted 

Number 
approved 

Rejection 
rate (%) 

Number 
submitted 

Number 
approved 

Rejection 
rate (%) 

Access Bank Nigeria Plc 5 4 20 0 1 -100 

Diamond Bank Nigeria Plc 0 0 0 0 0 0 

Ecobank Nigeria Plc 0 0 0 0 0 0 

Equatorial Trust Bank Plc 0 0 0 0 0 0 

Fidelity Bank Plc 1 1 0 4 3 25 

First Bank of Nigeria Plc 207 25 88 4 0 100 

First City Monument Bank Plc 0 0 0 0 0 0 

First Inland Bank Plc 0 0 0 0 0 0 

Guaranty Trust Bank Plc 7 6 14 0 0 0 

Intercontinental Bank Plc 0 0 0 0 0 0 

Nigeria International Bank Plc 0 0 0 0 0 0 

Oceanic Bank International Plc 1 1 0 0 0 0 

Platinum Habib Bank Plc 0 0 0 0 0 0 

Skye Bank Plc 6 3 50 0 0 0 

Spring Bank Plc 0 0 0 0 0 0 

Stanbic – IBTC Bank Plc 3 3 0 0 0 0 

Standard Chartered Bank Nigeria Plc 0 0 0 0 0 0 

Sterling Bank Plc 0 0 0 0 0 0 

Union Bank Plc 8 8 0 3 4 -33 

United Bank for Africa Plc 97 25 74 18 7 61 

Unity Bank Plc 4 3 25 0 0 0 

Wema Bank Plc 0 0 0 0 0 0 

Zenith Bank Plc 8 6 25 3 4 -33 

Total 347 85 76 32 19 41 

0

5

10

15

20

25

2006 2007 2008 2009 2010 2011 2012

p
e

rc
e

n
t

Agriculture Solid Minerals Exports Manufacturing



 

13 

SUMMARY | APRIL 2010 

There are positive trends in terms of demand and supply of credit and in understanding of implementation proce-

dures of CACS. These all have led to a rising trend in funds release by CBN and loan disbursement by commercial banks. 

This understanding is evidenced by the reduction in the rejection of loan applications by the commercial banks. By the end of 

2010, 76 percent of loan applications from the private sector were rejected. By the end of 2012, however, the number of loan 

applications had increased and the rejection rate had declined to 52 percent (Tables 3.1 and 3.2). 

Table 3.2—Loan application rejection rates under the Commercial Agriculture Credit Scheme, 2012 

Bank 

Private State 

Number 
submitted 

Number 
approved 

Rejection 
rate (%) 

Number 
submitted 

Number 
approved 

Rejection 
rate (%) 

Access Bank of Nigeria Plc 10 10 0 1 1 0 

Citibank (NIB) Plc 2 2 0 0 0 0 

Diamond Bank Nigeria Plc 12 12 0 0 0 0 

Ecobank Nigeria Plc 7 6 14 0 0 0 

Enterprise Bank 3 3 0 0 0 0 

Equatorial Trust Bank Plc 0 0 0 0 0 0 

Fidelity Bank Plc 3 3 0 5 5 0 

Fin Bank Plc 0 0 0 0 0 0 

First Bank of Nigeria Plc 223 56 75 4 4 0 

First City Monument Bank Plc 7 7 0 0 0 0 

Guaranty Trust Bank Plc 8 8 0 1 1 0 

Mainstreet Bank (AfriBank) 1 1 0 0 0 0 

Keystone Bank 1 1 0 0 0 0 

Skye Bank Plc 10 7 30 0 0 0 

Stanbic – IBTC Bank Plc 23 23 0 0 0 0 

Standard Chartered Bank Nigeria Plc 0 0 0 0 0 0 

Sterling Bank Plc 10 10 0 2 0 100 

Union Bank Plc` 15 15 0 6 5 17 

United Bank for Africa Plc 99 26 74 18 9 50 

Unity Bank Plc 21 21 0 0 0 0 

Wema Bank Plc 4 4 0 0 0 0 

Zenith Bank Plc 13 13 0 5 5 0 

Total 472 228 52 42 30 29 

The drop in loan application rejection rates is associated with the rising number of participating banks and a substan-

tial increase in the volume of loans. The number of participating banks rose from only 2 in 2009, to 11 in 2010, to 19 in 2012, 

and to 20 in 2014. Three banks, United Bank for Africa, Zenith Bank and First Bank of Nigeria, in that order, have dominated 

the loan market under CACS, based on the share of cumulative loans disbursed in 2010, 2012, and 2014. Cumulative loans 

disbursed stood at ₦96.8 billion in 2010. This increased to ₦198.2 billion in 2012, and to ₦237.0 billion in 2014 (Table 3.3). 

Of these loans, the percentage share of the three leading banks stood at 60, 46 and 46 percent in 2010, 2012, and 2014, 

respectively, with the United Bank for Africa being the leader during the period (Table 3.4). In their response to the stimulus 

provided by government, the banks have demonstrated a clear preference for lending to the private sector, particularly to 

large-scale producers. Their hesitation to lend to the state governments for on-lending to small-scale farmers is evident in 

the fact that only five banks lent to them in 2010 and eight banks in 2012, whereas the number of commercial banks which 

lent to the large-scale private borrowers increased from 11 to 19 during the same period. Small-scale farmers faced discrimi-

nation from both the banks and the states who are supposed to serve as the on-lenders. As at 2014, not all 36 states in the 

country have availed themselves of the opportunity to borrow under CACS for on-lending to farmers’ cooperatives. The 

limited coverage of smallholders under CACS is not an operational aberration; indeed it is in compliance with the design of 

the scheme. 



 

14 

SUMMARY | APRIL 2010 

Table 3.3—Cumulative funds released by commercial banks to clients, 2010, 2012, and 2014, ₦ billions 

Bank 

2010 2012 2014 

Private States Total Private States Total Overall 
Loans, 

(number) 

Access Bank of Nigeria Plc 4.2 1.0 5.2 9.3 1.0 10.3 12.6 15 

Citibank (NIB) Plc - - - 3.0 - 3.0 3.0 2 

Diamond Bank Nigeria Plc - - - 2.7 - 2.7 3.0 13 

Ecobank Nigeria Plc - - - 3.7 - 3.7 4.5 8 

Enterprise Bank Plc - - - 0.4 - 0.4 0.5 6 

Fidelity Bank Plc 0.5 3.0 3.5 2.6 6.0 8.6 10.8 8 

First Bank of Nigeria Plc 9.1 - 9.1 18.2 4.0 22.2 27.1 70 

First City Monument Bank Plc - - - 4.7 - 4.7 5.4 11 

Guaranty Trust Bank Plc 4.2 - 4.2 4.8 1.0 5.8 5.8 9 

Heritage Bank Plc - - - - - - 1.2 2 

Keystone Bank - - - 0.2 - 0.2 2.1 3 

Mainstreet Bank (AfriBank) - - - 2.0 - 2.0 2.0 1 

Oceanic Bank International Plc 2.0 - 2.0 - - - - - 

Skye Bank Plc 6.0 - 6.0 9.2 - 9.2 9.6 7 

Stanbic – IBTC Bank Plc 1.3 - 1.3 11.7 - 11.7 14.3 29 

Sterling Bank Plc - - - 4.8 2.0 6.8 12.3 18 

Union Bank Plc 7.4 3.5 10.9 12.4 5.5 17.9 18.2 21 

United Bank for Africa Plc 28.7 6.5 35.2 32.3 9.5 41.8 41.8 35 

Unity Bank Plc 5.5 - 5.5 19.5 - 19.5 22.3 24 

Wema Bank Plc - - - 0.7 - 0.7 1.1 6 

Zenith Bank Plc 9.8 4.0 13.8 18.0 9.0 27.0 39.1 25 

Total 78.8 18.0 96.8 160.2 38.0 198.2 237.0 313 

Table 3.4—Proportion of all loans disbursed by leading commercial banks under CACS 

Bank 2010 2012 2014 

United Bank for Africa Plc 36.3 21.1 17.6 

Zenith Bank Plc 14.3 13.6 16.5 

First Bank of Nigeria Plc 9.4 11.2 11.4 

Sub-total 60.0 45.9 45.6 

Others 39.9 54.1 54.4 

Total 100.0 100.0 100.0 

The emphasis on large-scale enterprises right from the design stage is an agreement between government and the 

banking sector to favor less risky borrowers. There are three issues arising from this bias to the design of CACS: 

1. This inherent approach of carrying coal to Newcastle is inadvisable. The large enterprises targeted under CACS 

have the wherewithal to borrow from the banking sector on a commercial, unsubsidized basis and are in a position to 

take advantage of a variety of financing options. In contrast, smallholder farmers with limited options for acquiring 

credit and little savings, are neglected by the scheme and left alone to fend for themselves. Without adequate financ-

ing, such farmers can neither expand their scale of production nor attain a higher level of commercialization.  

2. Growth in Nigeria’s agricultural sector at the time CACS was introduced derived principally from the contribution of 

smallholders. To the extent that their contribution is not considered in determining the targeting of the lending stimu-

lus, it will be difficult to achieve significant transformation of the agricultural sector through which the less resource 

endowed participants in the value chain will be empowered to play active roles.  

3. Ignoring small-scale farmers in the order of lending priority under CACS undermines their participation in value chain 

development. It is not surprising that only discrete financing of value chains has been going on under CACS. Inade-

quate attention has been given to the development of critical links and governance of the agricultural value chains, 



 

15 

SUMMARY | APRIL 2010 

including the empowerment of the primary producers to be active players in them. Table 3.5 presents the structure of 

loans financed by the banks with regard to specific stages of the value chain. The cumulative total number of loans 

rose from 228 in 2012 to 274 in 2014 (August), while the loans disbursed increased from N160.2 billion to N190.3 

billion accordingly. Although production loans represents about 50 percent in each of the sub-periods, there is no fi-

nancing link apparent between the production stage and any of the other stages of the value chain. Moreover, pro-

duction by small-scale farmers is left out of this financing structure. 

Table 3.5—Structure of cumulative projects financed by value chain 

Project category 2012 2014 

Input supply 

-number 
-value (₦ billion) 
-number share (%) 
-value share (%) 

 
1 

0.6 
0.4 
0.3 

 
1 

0.6 
0.4 
0.3 

Production 

-number 
-value (₦ billion) 
-number share (%) 
-value share (%) 

 
112 
55.5 
49.1 
34.6 

 
139 
66.2 
50.7 
34.8 

Processing 

-number 
-value (₦ billion) 
-number share (%) 
-value share (%) 

 
87 

82.4 
39.2 
51.5 

 
105 
95.4 
38.6 
50.2 

Marketing 

-number 
-value (₦ billion) 
-number share (%) 
-value share (%) 

 
16 

15.3 
7.0 
9.6 

 
15 

20.1 
5.5 

10.6 

Storage 

-number 
-value (₦ billion) 
-number share (%) 
-value share (%) 

 
12 
6.4 
5.6 
4.0 

 
13 
8.0 
4.7 
4.2 

Total number 228 274 

Total value 160.2 190.3 

RESULTS OF THE ECONOMETRIC ANALYSIS OF THE IMPACT OF CACS 

The interest of the commercial banks in agricultural lending has been stimulated under CACS in terms of increased participa-

tion and rising loan disbursement levels. The commercial banks have taken advantage of the opportunity given to them to 

rely on off-balance sheet resources through CACS to engage in agricultural credit transactions in view of expected financial 

benefits. It is, therefore, expected that agricultural lending should expand due to the financial stimulus provided by the 

government. This section presents the results of an econometric analysis which seeks to determine the impact of the CACS 

on credit supply to the agricultural sector. The study hypothesized that agricultural lending is significantly affected by interest 

rate, size of banks (proxied by total assets), capital ratio, liquidity ratio, number of bank branches, age of bank, and level of 

borrowers’ risk. It was further hypothesized that lending would be higher as a result of the financial stimulus provided by the 

government with the instrumentality of CACS and that the stimulus would have significant impact on the risk-taking behavior 

of commercial banks as regards lending to agriculture. A random-effects Tobit regression was estimated to test these 

hypotheses. The results of the agricultural loan supply equation are presented in Table 3.6, while the elasticity coefficients 

for the regressors in the equation are presented in Table 3.7. 

The results show that agricultural loan supply depends significantly on bank’s size, age, borrowers’ risk, and gov-

ernment’s financial stimulus under CACS. The interest rate (lending rate), commercial banks’ capital ratio, liquidity ratio, and 

number of branches are not statistically significant predictors of agricultural loan supply. The estimated coefficient for interest 

rate has the expected negative sign, but is not statistically significant. As expected, the coefficients for capital ratio, liquidity 

ratio, and bank branches have positive signs indicating that higher levels of these variables are associated with higher 



 

16 

SUMMARY | APRIL 2010 

probabilities of loan supply. However, as the coefficients are not statistically different from zero, they mean little if anything as 

far as agricultural lending in Nigeria during the period was concerned. 

Table 3.6—Results of estimated random-effects Tobit model for agricultural lending  

Variable Coefficients Standard Error P[|Z|>z] 

Interest rate -3.816 3.478 0.273 

CACS dummy 2.2921*** 0.754 0.000 

Total assets 0.145* 0.086 0.093 

Capital ratio 0.380 0.294 0.196 

Liquidity ratio 0.414 0.448 0.356 

Bank branch 0.146 0.226 0.517 

Age of bank -0.633** 0.286 0.027 

Loan risk 0.489*** 0.147 0.001 

CACS*Loan risk -0.004*** 0.002 0.093 

Constant 14.011** 7.240 0.053 

Log likelihood = -69.941; Wald chi2 (9) = 35.36; Prob > chi2 = 0.000 

/sigma_u 7.44e-18 0.334 1.000 

/sigma_e 1.454 0.165 0.000 

Rho 2.62e-35 2.35e-18  

Likelihood-ratio test of sigma_u=0: Chi2 (01) = 0.00 
Prob > Chi2 = 1.000 

Table 3.7—Estimated elasticity coefficients of the variables in the random-effects Tobit model  

Variable Coefficients Standard Error P[|Z|>z] 

Interest rate -1.077 0.982 0.273 

CACS dummy 0.320*** 0.083 0.000 

Total assets 0.219* 0.131 0.093 

Capital ratio -1.116 0.089 0.196 

Liquidity ratio -0.064 0.069 0.356 

Bank branch 0.099 0.152 0.517 

Age of bank -0.244** 0.110 0.027 

Loan risk 0.021*** 0.006 0.001 

CACS*Loan risk -0.030*** 0.017 0.094 

The signs of the coefficients for the size of the bank in total assets and the CACS dummy variable are positive and 

significant. These results show that loan supply is higher for banks that are bigger in size and that it is significantly higher 

under CACS than before; thus underpinning the positive supply effect of government’s financial stimulus. However, older 

banks show a decrease in loan supply – an increase of one percent in the age of a bank is associated with a reduction of 

0.24 percent in loan supply. In contrast, a similar increase in the total assets of a bank is associated with an increase of 0.22 

percent in loan supply (Table 3.7).  

An interaction term was included in the model to determine whether banks’ disposition to risk taking in agricultural 

lending has been affected by the government’s financial stimulus. The coefficient of loan risk is positive and highly signifi-

cant. The coefficient of the interaction term is also significant, but the sign is negative. This shows that CACS has significant-

ly affected the risk-taking behavior of commercial banks. The results shows that prior to CACS rising borrowers’ risk was 

associated with higher probability of loan supply, whereas under CACS risk-taking by commercial banks is dampened ─as 

borrowers’ risk increases, the probability of loan supply decreases. As shown in Table 3.7, an increase of one percent in 

borrowers’ risk level is associated with an increase of 2.0 percent in loan supply, whereas under CACS it is associated with a 

decline of 3.0 percent in loan supply. Under CACS, the amount of loan supplied to agricultural enterprises tends to be higher 

for borrowers with lower risk levels than for borrowers with higher risk levels. This finding does not support the theoretical 



 

17 

SUMMARY | APRIL 2010 

predictions of the risk behavior of lenders in developed countries. In a recent study, Duchin and Sosyura (2012) found that 

capital support by government led to higher risk taking by banks. They found that increases in risk taking were more pro-

nounced at larger banks which were more likely to receive continued government protection. 

Our findings are broadly consistent with theories that predict an increase in risk taking incentives in response to gov-

ernment protection (Berger et al. 2011; Black and Hazelwood, 2013; Bhattacharyya and Purnanandam, 2011). This is due 

mainly to lax monitoring and weak regulatory regime. This is understandable because the 2008-2009 financial crises in many 

developed countries was actually due to very weak bank regulation in the face of generous policy incentives to encourage 

lending to various groups of consumers. The fact that the findings of this study are at variance with what obtains in devel-

oped economies is not surprising because the lower risk-taking attitude of commercial banks in the case of Nigeria is a 

reflection of the enforcement of the CACS implementation guidelines and extant regulatory policies by CBN. Although 

commercial banks find it difficult to adhere strictly to CACS operational guidelines, recalcitrant banks have not been spared 

from sanctions by CBN. CBN applies sanctions against any infringement from time to time to serve as a deterrent to recalci-

trant banks. For instance, in May 2014, one of the banks was fined a sum of ₦353 million for infraction of the CACS guide-

lines in one month. In point of fact, the cumulative penalty charged the banks that have violated CACS guidelines from 

inception of the scheme in 2009 to May 2014 stood at ₦1.2 billion (CBN, 2014). The effects of these punitive actions are 

capable of attenuating the inclination of banks towards risk taking. This explanation is consistent with recent studies which 

suggest that disciplinary actions and penalties imposed by regulators tend to reduce banks’ risk-taking (Duchin and Sosyura, 

2012; Berger, et al., 2011). 

3.2 Design and Implementation of NIRSAL 

The federal government initiated NIRSAL, the Nigeria Incentive-based Risk Sharing for Agricultural Lending scheme, in July 

2011. It is an agricultural finance framework to address the problem of low levels of agricultural financing in the country. 

NIRSAL, unlike previous schemes which encouraged banks to lend without a clear strategy to the entire spectrum of 

agricultural value chains, emphasizes a value chain approach to agricultural lending and insists on covering all categories of 

producers─ small, medium, and large-scale. The implementation process of NIRSAL generally has been on track. The 

organization has now developed into a new non-bank financial institution. It was established with active support and partner-

ship of the Bankers Committee and FMARD. It is fully financed by CBN and charged with enabling banks to lend with 

confidence to cohesive and complete agricultural value chains and to offer technical assistance and reasonable incentives to 

banks reduce risk in their lending. 

To achieve these objectives, CBN provided an initial start-up investment of ₦75 billion to facilitate the implementa-

tion of the five pillars that seek to “de-risk” agricultural lending and lower the associated transaction costs. The allocation of 

this investment is as follows:  

1. Risk-sharing facility (₦45 billion): To break down banks’ perception that agriculture is a high-risk sector, NIRSAL is 

designed to share their losses on agricultural loans by issuing them a credit risk guarantee cover.  

2. Insurance facility (₦4.5 billion): The scheme expands the insurance products available for agricultural lending from 

the current coverage to help reduce credit risks and increase lending across the entire value chain.  

3. Technical assistance facility (₦9 billion). NIRSAL is building the capacity of banks to lend sustainably to agriculture, 

equipping agricultural producers with knowledge and skill to borrow, to use their loans judiciously, to regard agricul-

ture as a business, and to produce high quality goods for the market. 

4. Holistic bank rating mechanism (₦1.5 billion): This mechanism rates banks based on the effectiveness of their agri-

cultural lending and on their social impact in doing so. 

5. Bank incentives mechanism (N15 billion): This offers banks additional incentives to build their long-term capabilities 

to lend to agriculture. NIRSAL is both a financier and an adviser to agribusiness firms. 

Whereas agribusiness firms follow standard financial procedures to access loans, including compliance with collat-

eral requirements, the lending conditions for farmers have specialized requirements. These focus on cooperative societies 

and on cooperation with NIRSAL with a view to coordinating commercial activities along agricultural value chains. For 

instance, a production cooperative organizes its members into clusters of farmers. Each cooperative is required to appoint a 

business manager to oversee its affairs. The cooperative also signs agreement with a consortium of input suppliers for bulk 

purchase of modern inputs for its members. It organizes transportation to deliver inputs to members and to collect produce 



 

18 

SUMMARY | APRIL 2010 

from farms to a designated warehouse and temporarily hold the produce after harvest until prices improve. At the same time, 

the cooperative signs an agreement with a network of processors. The exact processing capacity required can be estimated 

based on average processing speed per day. The agreement will include financial terms – for example, price per ton or bag 

processed – with the processor acting as a service provider. Depending on the type of crop, state inspectors will be present 

at the site of each processing plant to supervise grading and packaging. The cooperative also signs sales agreements with 

end-users of the processed crops, both domestic and foreign buyers. Based on price and volume agreed, under these 

arrangements the business manager can offer members a price for their produce that reflects the value of the processed 

commodity rather than the primary commodity in its raw form. 

The various agreements are part of the documentation required by commercial banks to enable them provide nec-

essary financial support. Other documents required are a registration certificate for the cooperative from a state or federal 

agency; a letter of application from the cooperative’s senior management stating the purpose of borrowing; an itemized list of 

cooperative members who are borrowing; and the exact amount each wants to borrow, including contact addresses and 

signatures. The cooperative also must submit a copy of its bank account statements for the past six months. It is not neces-

sary that the cooperative operate an account at the bank from which it intends to borrow. Also, the cooperative should 

provide a copy of a sales agreement indicating a pre-planned schedule of sales to a buyer or buyers, with volumes tallying 

with planned production for the particular production season. Also required is a joint and several guarantee from coopera-

tives' executives which may be signed nationally or at state level. This potentially will reduce collateral requirements. There 

is provision for a 10 percent equity contribution or negotiated collateral if the guarantee is considered inadequate. In addition, 

state monitoring and recovery teams are to be formed to oversee village level registration and monitor activities while crops 

are still being tendered on the field. As harvest approaches, the team is to liaise with farmers and designated processor to 

avoid side-selling to middle men. 

NIRSAL provides cash as an interest drawback to farmers who pay back their loans on schedule. The level of subsi-

dy can be negotiated, but it ranges from 30 to 50 percent. The lending guidelines also provide for a trust fund to act as 

collateral for borrowing by cooperative members in a state. The fund will remain in a CBN account for NIRSAL and an 

accounting entry taken against it to secure the borrowing of funds by farmers. Cash will only be spent or called in event of a 

loss, just as NIRSAL’s guarantee then will be called. 

PERFORMANCE OF NIRSAL 

NIRSAL covers all crop and livestock activities with an emphasis on three key functions: (1) credit guarantees on loans made 

to agribusiness investors, farmers, companies and other related participants; (2) investment advice to farmer groups and 

value chains actors; and (3) strategic advice to state governments, cities, and local governments on how to create an 

enabling business environment for agriculture. The scheme has made considerable achievements in all three areas. Notable 

achievements include providing multiple “financing guidelines” to support bank capacity building and lending in areas such 

as cassava production, cassava grits equipment, cassava chip exporting, and procuring and using small-scale rice paddy 

cultivation and mechanization equipment. NIRSAL also launched multiple “value chain fixing” initiatives based on client 

requests. Examples of these efforts include the Lagos ₦30 billion aquaculture project that aims to capture 25 percent of 

Nigerian fresh fish consumption and the ₦48 billion tomato paste production and processing domestication project. Value 

chain advisory services are also being provided for various states under NIRSAL in respect of rice, cassava, tomato, beef, 

leather, maize, soybeans, cotton, jatropha, pineapples, oil palm, and wheat value chains. NIRSAL is also engaging with key 

companies in value chains to build closer linkages between such companies and suppliers, including smallholder farmers. A 

number of companies with existing relationships to previous CBN financing schemes like CACS are potential clients. 

As regards credit guarantees, NIRSAL has issued a total of fifty three CRG covers valued at ₦19.3 billion from 2012 

to 2014 (August). In addition eighteen GES CRGs valued at ₦3.9 billion were approved through five banks under the 2014 

NIRSAL-GES framework; thus bringing the cumulative disbursement under NIRSAL GES Scheme to ₦32.9 billion for 158 

projects. Progress is also being made in respect to the interest draw back (IDB) which is another key component of 

NIRSAL’s design. IDB claims are being paid quarterly in respect of each of the projects. Cumulatively, 25 projects have 

benefited under IDB (as of August, 2014) and the total IDB claims paid stood at ₦206 million. With regard to the GES, the 

total IDB paid by 2014 stood at ₦199 million for 73 projects. 

BANKS’ RESPONSE TO NIRSAL 

Even though NIRSAL provides incentives to attract the banking sector to lend to agriculture, it took considerable time and 

effort on the part of the scheme organizers and FMARD to persuade commercial banks to take advantage of NIRSAL 



 

19 

SUMMARY | APRIL 2010 

lending opportunities and incentives. In 2012, when the banks were expected to finance agrodealers and input suppliers, 

many of the banks remained unconvinced about the prospects of NIRSAL, and so the level of financing was quite low. By 

2013, there was a change of attitude as it became evident that government was determined to implement its ATA and that 

the banking sector has a lot to gain from financing the supply of inputs ─ a critical component which would require invest-

ments running into billions of naira. Only a few of the banks took tangible steps in 2012 and early in 2013 to articulate 

procedures and actualize lending based on the value chain approach enshrined in NIRSAL operations. During the first and 

second quarters of 2013, the views of the banks were sought for this study regarding the steps they have taken so far. The 

responses of a few of them are shown in Table 3.8. 

Table 3.8—Commercial banks’ initial responses to NIRSAL, 2012-2013 

Bank Initial responses to NIRSAL’s operations 

Access Bank of Nigeria Plc Since the inception of NIRSAL, Access Bank has processed and obtained a CRG in favor of its customers 
worth N1.44 Billion. Internally, the bank is looking at boosting the number of customers covered under the 
NIRSAL scheme. Has popularized the scheme with staff and customers to boost NIRSAL related credits. 

Citibank (NIB) Plc Created awareness with clients that participate in agricultural value chains. In discussions with different 
clients on the added value of accessing agricultural funding via NIRSAL. 

Diamond Bank Plc Participated in a broad range of value chains and at different stages in those value chains – cotton, palm oil, 
rice, cassava, input supply, and mechanization. Has not funded any of the transactions yet due to initial 
challenges experienced, but are designing value chain financing products that are based on NIRSAL 
guarantee. 

Eco Bank Plc Eco Bank’s loan portfolio has grown as a result of the various incentives provided under NIRSAL, particularly 
the CRG and IDP. The CRG has enabled the bank to finance some customers that would not have financed 
otherwise because they did not have collateral. The IDP is strictly for the customer’s benefit, as it reduces 
their cost of borrowing and enhances their profitability. 

First Bank Plc Aligns product scheme with the credit risk guarantee benefit of NIRSAL, adopting the interest rebate in the 
scheme to offer loans to agricultural enterprises at lower interest rate and leverage on the scheme to provide 
funding for input procurement and distribution and tractor acquisition for Tractor Hiring Service Providers. 

Guaranty Trust Bank Plc Has embarked on creating awareness about NIRSAL to all account and credit officers and agriculture value 
chains practitioners. 

Due to the sluggish response to the NIRSAL scheme by the commercial banks, the arrangement that they would fi-

nance the agrodealers in 2012 to enable them to purchase fertilizer from the suppliers failed. This led to the disruption of 

fertilizer distribution in many states. With a lack of finance from the bank, agrodealers could not purchase fertilizer from 

suppliers and many registered farmers could not be supplied (Olomola, 2014). The situation changed in 2013 as many input 

supply companies embraced the GES scheme. This is because companies had confirmed the government’s commitment to 

pay according to the schedule, and in part due to the clearly laid-down lending framework and incentives agreed upon by the 

participating banks and NIRSAL Thus, for the 2013 GES, 13 commercial banks granted loans to the agrodealers to finance 

their input distribution across the country. Nonetheless, a substantial part of the ₦19.6 billion loan came from only six banks 

namely (Table 3.9). This is an indication that, despite the availability of financing incentives, only a few banks have the 

capacity to cope with the requirements of agricultural lending in accordance with NIRSAL guidelines. 

The fact that the response in 2013 was much better than in 2012 also shows that some of the banks are becoming 

more interested in agricultural lending and are making efforts to develop the necessary capacity to do so. The rising interest 

of commercial banks in NIRSAL is due to better understanding of its operations by the banking sector, plus the incentives 

offered, such as improved guarantee cover and provision for interest rate rebates. The credit guarantee varies according to 

specific stages of the value chain. The stages covered are (1) primary production of agricultural products with 75 percent of 

12.5 percent of first loss or 10 percent face value, (2) agroprocessing which has a guarantee cover of 50 percent of 12.5 

percent of first loss or 7.5 percent of face value and (3) other stages, including logistics, which attract a guarantee cover of 

30 percent of 12.5 percent of first loss or 5 percent of face value. The categories of borrowers that can benefit from this 

incentive are companies, large individual entrepreneurs, and cooperatives. NIRSAL commits to providing interest rate rebate 

of 40 percent to those who repay loans on time for primary production, 25 percent for processors, and 20 percent for others. 

For borrowers (farmers) who are not connected to specific market outlets, NIRSAL works out modalities to train them to 

become suppliers to processors. NIRSAL also commits to working with value chains to provide improved technical assis-

tance to farmers directly or via industry associations. 



 

20 

SUMMARY | APRIL 2010 

Table 3.9—Commercial banks’ loans to agrodealers during the 2013 Growth Enhancement Support scheme 

Bank 

Amount 
loaned  

(₦ millions) 
Percent of 

total 

Mainstreet Bank Ltd 6,568 33.5 

Zenith Bank 4,000 20.4 

United Bank for Africa Plc 3,851 19.6 

Sterling Bank Plc 1,623 8.3 

First Bank of Nigeria Plc 1,104 5.6 

Enterprise Bank Ltd 934 4.8 

Unity Bank Plc 500 2.3 

Access Bank Plc 326 1.7 

Union Bank Plc 270 1.3 

Jaiz Bank Plc 157 0.8 

Diamond Bank Plc 155 0.8 

Wema Bank Plc 109 0.5 

First City Monument Bank Plc 15 0.1 

Total 19,612 100.0 

4. SUMMARY, POLICY IMPLICATIONS, AND CONCLUSIONS 

The past five years have witnessed renewed efforts by the federal government of Nigeria to boost agricultural financing 

through injection of capital into the banking sector and policy reforms to reduce agricultural lending risks and thereby expand 

credit supply to the sector. This study examines the financial innovations taken and commercial banks’ response to the 

policy incentives. This section presents highlights of the main findings, policy recommendations, and conclusions. 

4.1 Main findings 

This study has examined the design and implementation of financial initiatives to encourage commercial banks to expand 

their lending to agriculture in Nigeria with an emphasis on capital infusions by government through the instrumentality of 

CACS and incentives provided under NIRSAL to reduce lending risk. With regard to the CACS specifically, there are positive 

trends in loan requests and the degree of understanding of implementation procedures, leading to a rising trend in funds 

release by the CBN and loan disbursement by the commercial banks. The number of participating banks rose from only 2 in 

2009 to 20 in 2014. Three banks, United Bank for Africa, Zenith Bank and First Bank of Nigeria in that order, have dominated 

the loan market under the CACS. The development of critical links, governance of value chains, and empowerment of 

primary producers to be active players have been downplayed. Although production loans represents about 50 percent of 

total loans disbursed annually, there is no financing link between the production stage and any of the other stages in the 

value chains. More troubling, offering loans to support production by small-scale farmers generally is left out of this financing 

structure. However, this is more of a policy design defect rather than an implementation challenge. 

The econometric analysis of the effects of governments’ capital infusion into the banking sector on agricultural lend-

ing reveals that lending depends significantly on bank’s size, age, borrowers’ risk, and government’s financial stimulus under 

CACS. Although rising capitalization ratios, bank liquidity, and bank branching have a direct relationship to credit origination, 

their effects are not statistically significant. The results show that loan supply is higher for banks that are younger and bigger 

in size (in terms of total assets) and that loan supply is significantly higher under CACS than before. This implies that 

financial stimulus through CACS has elicited a significantly positive response from the commercial banks. Specifically, CACS 

has significantly affected the risk-taking behavior of commercial banks. The study shows that prior to CACS, higher borrow-

ers’ risk was associated with higher probability of loan supply, whereas under CACS risk-taking by commercial banks has 

been moderated – the probability of credit origination tends to decrease as borrowers’ risk increases. 

The introduction of NIRSAL in 2011 has bridged some of the policy gaps inherent in CACS. NIRSAL places greater 

emphasis on value