Why are banks not lending to agriculture?

A recent report by the National Bureau of Statistics (NBS) revealed that at ₦3.58 trillion, Nigeria’s oil and gas sector received the highest allocation of private sector credit - 22% of the total pot.

By comparison, second place was manufacturing at 14% while all other sectors received less than 10%. The agriculture sector which employs around half of working Nigerians and contributes around a third of the country’s GDP received only 3% of total bank credit.

These numbers are quite startling for a sector so vital; one which the government views as our only hope in fact. Why then is oil and gas still the banks' favourite?  

Firstly, commercial banks are profit-making institutions and are primarily interested in short-term lending and high returns. Given that most oil firms are mostly involved in the export of crude oil and the import of its refined products – a short-term activity; this coincides strongly with the preference of all banks.

This is in sharp contrast to agriculture investments which typically have longer gestation periods. Also, given the lack of sophistication in the small firms or farmers which make up Nigeria’s agriculture sector; they are often characterised by poor book-keeping practices, limited financial skills and lack of collateral facility – all three factors which strongly influence the lending decisions of banks. 

Why banks should allocate more credit to agriculture 

Regardless of these factors, the current situation requires change.

If we are indeed concerned with achieving development that is diversified, inclusive and sustainable, reducing barriers to credit in real sectors like agriculture should be a national priority for many reasons. Unlike the oil and gas sector which is capital-intensive and does not even make the top 15 employing sectors; agriculture is Nigeria's top employer. Agriculture's labour-intensive nature shows its potential to create jobs for Nigeria’s teeming population projected to surpass 300 million by 2050. 

Further, the sector will benefit those on low incomes thereby alleviating poverty and narrowing inequality. This is in contrast with growth in the oil and gas sector which largely benefits the rich or worse still, government officials who embezzle the proceeds.

Moreover, throughout the economic recession, agriculture remained the only sector which consistently recorded positive growth rates despite limited access to private sector credit. This begs to question the sector's potential if private banks got behind it. 

Lastly, the cyclical nature of the oil market makes it imperative for banks to diversify their loan portfolios. After oil prices crashed, banks' non-performing loans more than doubled from 2015 to 2017 to over 15% - higher than the 10% CBN limit required to pay dividends.

What can be done to allocate more credit to agriculture?

The critical question is what can be done to increase credit allocation to real sectors like agriculture? A Nigerian bank CEO provided some insight. He tried asking why anyone would lend to a farmer who "does not know how to use herbicides, who does not understand bookkeeping and who does not know that the money the lender gives to him is a debt that needs to be paid back."

Thankfully though, he offered hope through the Federal Government’s anchor borrower scheme, which makes banks more comfortable with lending to local farmers as their products are guaranteed offtake by bigger private sector companies. From this perspective, it is clear that de-risking lending agriculture remains a critical priority to stakeholders interested in seeing more credit allocation to it.

De-risking measures should include addressing the issue of collateral facilities. Government policies such as the Collateral Registry Act which ensures that  SMEs can register movable assets such as motor vehicles, cows, and accounts receivable in the National Collateral Registry will go a long way in enhancing their access to credit. Thus, the enforcement of this executive order is of crucial importance. Further, providing these small-scale businesses with the capacity to get formal titles and documentation for their land will improve their ability to secure credit facilities.

There is, however, an even more fundamental question of how many of the small-scale firms within the sector are included in the formal banking system to begin with. As the Central Bank of Nigeria stated, 40% of Nigerians do not own bank accounts. Given the rural nature and location of agriculture, it is likely to be a sizeable piece of that figure - in contrast with oil and gas.

How then is the sector expecting to receive credit in the same magnitude as oil? While there is a multitude of factors affecting credit allocation to the sector, perhaps the underlying issue is improving education, moving from very basic subsistence farming and boosting financial literacy in the sector.

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