Agriculture Financing in Nigeria
February 13, 2020, 8:45 pm
Agriculture has been the bedrock of the Nigerian economy for many years. Before crude oil became the favourite economic sector of the Federal Government of Nigeria, agriculture provided the revenue base used to grow Nigeria from her early birth until she approached her teenage years when the affection for crude oil took over. Agriculture is the largest employer of labour in Nigeria.
According to the National Bureau of Statistics, the size of the Nigerian economy is N39.4 trillion. Agriculture contributes 22.82% of the Nigerian economy or GDP– N8.99 trillion yet employs 70% of the Nigerian labour force. Also, according to the World Bank and IMF, the size or GDP of the Global Economy is $88 trillion. Agriculture contributes 6% of that which is $5.28 trillion.
Despite just contributing 6% to the Global economy, agriculture employs 28% of the world’s labour force– over 900 million people. The share of agriculture in total employment is shrinking across all country income groups. Globally, it has declined from 44% in 1991 to 28% in 2018 and is projected to keep falling meaning smaller number of people will be needed to produce the food and raw materials of over 7 billion people on planet earth. Therefore, all obstacles and problems hindering the productivity of the agriculture sector must be given priority attention!
There are many problems facing the growth and development of agriculture in Nigeria such as risk management, access to land and equipment etc. but chief among these problems is agriculture financing. Finance is required by the agricultural sector to purchase land, construct buildings, acquire machinery and equipment, hire labour, irrigation etc. Access to agriculture finance also accelerates the adoption of new technologies which increase farming productivity and output.
WHAT IS AGRICULTURE FINANCING?
Agriculture financing refers to (public or private) resources (in form of equity, gift or loan) for improving social welfare through development of agricultural sector. It encompasses not only government funds but also funds of non-governmental organizations that use matching grants to attempt to promote community and sector development, income equality and local empowerment. Public funds are subsidized funds and private funds regardless of their price, are not subsidized, unless a contribution is tax free or the market price is affected by an explicit or implicit state guarantee of the liabilities of a development finance institution.
TYPES OF AGRICULTURE FINANCING
Agriculture financing can be divided into the non-debt (non –leverage) and debt (leverage) categories. Debt financing represents funds with fixed contractual financial obligations, to which the resources of a nation, company or business might be plead as collateral. To cope adequately, in the long-run, a nation, company or businesses’ debt- servicing capacity must grow at a rate not less than the growth rate of its debt burden.
Non-debt funds on the other hand, do not impose fixed or compulsory servicing obligations on the nation, company or business. The regularity and magnitude of non-debt resource flows, however, depend on perceived country risk, relative investment yield and enabling factors such as the quality of governance.
Advantage and Disadvantage of the Types of Agriculture Financing
Available evidence indicates that (external) debt seems the most easily accessible source of financing to Sub-Saharan African (SSA) countries. Nevertheless, these same studies suggest that debts in general and external debts in particular, may aggravate the problem of underdevelopment of developing economies. This view is buttressed by the widespread unsustainable debt profile coupled with economic retardation of nearly all SSAs.
Research asserts that if a debtor country is unable to pay its external debt, debt payments become linked to the country’s economic performance. The country benefits only partially from an increase in output or exports because a fraction of increase is used to service the debt and accrues to the creditors. Thus, from the perspective of the debtor country as a whole, the debt overhang acts like a high marginal tax rate on the country, thus lowering the return to investment and providing a disincentive to domestic capital formation (private saving and investment).
Data shows that debt rather than equity (non-debt) is a cause of instability, because debt differs from non-debt contracts in that they require periodical payments of interest. To this end, researchers have argued that rigid debt contracts in combination with unexpected information were the main reason for the outbreak and prolongation of the Latin American debt crisis. This is evidenced when adverse information becomes available, the capital flows resulting from debt contracts are thus pro-cyclical: money leaves that country when times are bad, and comes in when they are good.
Some studies argued that foreign aid assists to close the exchange gap, provides access to modern technology and managerial skills, and allows easier access to foreign market. On the other hand, other studies related to the emergence of the view that external capital exerts significant negative effects on economic growth of recipient countries, argued that foreign aid is fully consumed and substitutes rather than compliments domestic resources. They further stated that foreign aid assists to import inappropriate technology, distorts domestic income distribution, and encourages a bigger, inefficient and corrupt government in developing countries.
The two forms of agriculture finance (debt and non-debt) exist in Nigeria via the following channels:
- Government Funding
The Federal Government of Nigeria is the major source of agriculture finance in Nigeria with several schemes and programmes designed to boost the agriculture sector in Nigeria. Some of these government schemes are Anchor Borrowers’ Programme, Commercial Agriculture Credit Scheme (CACS), and the establishment of The Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL). Government funding typically comes in the form of debt which must be paid back.
- Banks and Financial institutions
Financial institutions and banks also play a very significant role in agriculture finance in Nigeria. Apart from creating their own financial products to give funds to farmers, they also serve as conduits or mediums through which farmers and entrepreneurs can access funds from the several Federal Government schemes and programmes. Some of the financial products from banks and financial institutions designed to give funding to Nigerian agribusinesses are Grow and Earn More (GEM), Youth Agricultural Revolution in Nigeria (YARN), Micro SME Development Fund etc. Banks and financial institution agriculture funding are very often given as a debt which the farmer must pay back.
- Development Partners Funding
Development partners are government and non-government agencies setup to provide capital and resources for the solving of problems and issues responsible for stagnation and poverty faced by developing nations in strategic sectors. Some of these agencies are the African Development Bank (AfDB), the Alliance for a Green Revolution in Africa (AGRA), the Food and Agriculture Organisation (FAO) and the Bill & Melinda Gates Foundation, the United States Agency for International Development (USAID), the Netherlands Embassy, and the Department for International Development (DFID).
These development partners regularly organize trainings, issue grants and funding to enhance the agriculture sector in Nigeria. They play a very critical and important role in agriculture finance in Nigeria. Development partners funding can be in debt form or in grant form which though isn’t repaid but must be spent according to the purpose it was given for.
- Private Investors
These are wealthy individuals and private organizations, that aren’t setup as deposit money institutions, with large amount of capital in their control for the purpose of providing funding to agribusinesses in Nigeria. They have been very active in the Nigerian agriculture sector. Going by data from the National Bureau of Statistics, Agricultural sector received 1.12% or $60 million of the total capital inflows into the country in 2019.
Private investors funding can be in debt and non-debt or equity form.
HOW TO GET AGRICULTURE LOAN IN NIGERIA
There are various agriculture loans in Nigeria for farmers and entrepreneurs but the one most accessible to small and medium scale farmers in Nigeria is AGSMEIS (Agri-Business, Small and Medium Enterprise Investment Scheme). AGSMEIS is an initiative of the Bankers’ Committee established at its 331st Meeting held on February 9, 2017.
AGSMEIS supports government’s policy measures for the promotion of agricultural businesses, micro, small and medium enterprises (MSMEs) as vehicles for sustainable economic development and employment generation.
Objectives of AGSMEIS are:
- Improve access to affordable and sustainable finance by Agribusinesses, Micro, Small and Medium Enterprises (MSMEs)
- Create employment opportunities in Nigeria
- Boost the managerial capacity of agribusinesses and MSMEs to grow the enterprises into large corporate organizations in line with Federal Government’s agenda to develop the real sector and promote inclusive growth.
AGSMEIS loans are disbursed through NIRSAL (Nigeria Incentive-Based Risk Sharing System for Agricultural Lending) and to get this agriculture loan, you will need to submit the following documents to NIRSAL:
i. Duly completed application form.
ii. Bank Verification Number (BVN).
iii. Certificate of Training from recognized Entrepreneurship Development Institution (EDI) or evidence of membership of organized private sector association.
iv. Letter of Introduction from any of the following, Clergy, Village Head, District Head, Traditional Ruler, senior civil servant, etc. (for individuals/micro enterprises only).
v. Evidence of registration of business name or certificate of incorporation and filing of annual returns (where applicable) in compliance with the provisions of the Companies and Allied Matters Act (1990).
vi. Tax Identification Number (TIN) and current Tax Clearance Certificate (TCC) where applicable
PROBLEMS OF AGRICULTURE FINANCING IN NIGERIA
The process of getting agriculture financing in Nigeria is complicated and takes too long. For example, consider the AGSMEIS (Agri-Business, Small and Medium Enterprises Investment Scheme). The scheme has been established for over 2 years but farmers have only recently started receiving the money. This demonstrates that agriculture finance in Nigeria isn’t processed in a timely manner to offer prompt financial assistance to the farmers whose operations require quick injection of funds.
Also the process of getting the money is very complicated: they want busy farmers and entrepreneurs to take 3 weeks off their farm and agribusinesses to attend a course on entrepreneurship so that they can present an entrepreneurship certificate to get funding. This is a requirement that practicing farmers should be excluded from. Farmers with existing businesses of at least 2 years should be exempted from this condition.
They also want farmers and entrepreneurs to get reference letters from their pastors or imams or traditional ruler. What if they don't go to church or mosque or know any traditional ruler? Provisions must be made to ensure that all law-abiding farmers regardless of their level of religious commitment or activities should have a way of proving their trustworthiness either via police report or through their banks, who handle their money and can vouch for their financial responsibility.
THE CASE FOR AGRIBUSINESS EQUITY INVESTOR
Not all farmers and entrepreneurs have the luxury of being able to bring their products to market without some external financial help. In some instances, the project is capital intensive and hence may need a portfolio of investors. Others have the desired traction and want to pursue explosive growth (or believe the market opportunity may be fleeting); for these categories of farmers, external investment is ideal.
There is no doubt that a number of companies and businesses have benefited enormously from private equity investment (regardless of the type) over the years. These companies have typically shared a number of similarities: they faced explosive growth opportunities; had an ambitious management team; and had a clear market opportunity ‘with scalability’. In short, if you have a great team, a great product with a significant (but fleeting) market opportunity, raising capital via equity investors makes perfect sense.
THE CASE AGAINST EXTERNAL EQUITY INVESTMENT
Despite the hype, external investment is not for everyone – especially given that it typically comes at a heavy cost, both in equity terms, time demands, resultant obligations, and in an entrepreneur’s ability to make decisions independently. If all these factors don’t appeal to you, it is best for you to develop your businesses without external investment.
WHAT IS EQUITY INVESTMENT?
Equity investment is investment capital or funding provided by an equity investor typically in exchange for equity or shares in your business. The equity investor can be an organization, company or a rich individual who brings more to the table than just cash. They may also bring specific industry expertise, credibility to a youthful team or access to influential contacts. The cash or ‘smart money’ (i.e., money from well-known/ well connected equity investors with a reputation for nurturing entrepreneurs in your specific industry) is generally their own, rather than other people’s money (as would be the case with venture capitalists), and the investment level is typically above $1 million.
Equity investment is associated with later stage investment, when the capital requirements are larger. Given this stage investment, the associated risks for the investor tend to be lower: risk of the company failing is lower, no risk of dilution if the company is successful and needs additional investment, etc. As a result, equity investors typically require a modest return for their investments. It is worth noting that the traditional delineations defining the type of investment are breaking down as investment levels grow and more equity investors align with fellow equity investors so they invest as equity groups rather than solo equity investors (helping them to diversify their risk in the process).
WHAT ARE THE MAIN ADVANTAGES OF SECURING EQUITY INVESTMENT?
For farmers and entrepreneurs, there are a number of advantages in funding your business with equity investment. These include:
Access to capital – the most obvious advantage of equity investment is that it is an investment in your business at a time when most others will eschew the opportunity, deeming it ‘too risky’.
Access to networks – if you can secure investment from someone with a network in your particular industry, you will be able to leverage their contacts to support development of your business and yourself.
Relatively straightforward process – the process of securing equity investment is considerably less stressful than trying to secure grants or loans.
No cash-flow implications – Unlike funding your business with loan or debt, which needs to be serviced on a regular basis and depletes cash at precisely the point where you need to protect it, equity investment has no such monthly repayment obligations.
Access to experience – assuming the equity is an ‘active investor’ with a proven track record; it is likely that you will be able to draw on their experience when making decisions.
MAIN DRAWBACKS ASSOCIATED WITH SECURING EQUITY INVESTMENT
Given that most interactions between equity investors and entrepreneurs are similar to the meeting between David and Goliath, where sophisticated investors are interacting with unsophisticated farmers and entrepreneurs (in terms of their understanding of investment finance), it is important that entrepreneurs are cognisant of the risks they are signing up to. Equity investment comes with a number of costs, the main one being that it is an extremely expensive form of capital for a startup or new businesses. This (non-exhaustive) list represents some of the main drawbacks:
High cost – given the high risk associated with private equity, the returns demanded tend to be very aggressive from the entrepreneur’s perspective.
Time-consuming process – the process can be extremely time-consuming, costly, and very distracting for entrepreneurs at the very time they need to be focused on building their businesses. Many entrepreneurs are not aware that the odds of successfully gaining investment are extremely long, as the vast majority of business plans that are reviewed do not result in funding.
Dilution – once you take an external investment, you are no longer in full control of your own (or your company’s) destiny, and obviously your ownership percentage declines.
External interference – investors are keen to ensure that business decisions will help them achieve their desired outcome, so you can end up with interference where goals are not aligned or when decisions you make are challenged by the investor.
The Marriage – term sheets (documents that contain the material terms relating to the agreement) typically contain a number of clauses that are primarily designed to protect the investors. The relationship tends to work well when the companies experience rapid growth and surpass plans and the investor has a liquidity event. However, in most cases, the journey is not so smooth and as a result it can lead to conflict between the entrepreneurs and the investors.
Gamesmanship – given that the primary objective of the equity interaction is to secure funds, investors can drag investment decisions out, increasing the pressure on the entrepreneur (who may need the funds in a hurry) so they can secure better terms (as the cash runs out).
Disclosure – Given the equity investor will be scrutinizing your business, you will be disclosing a lot of commercially sensitive information. Hence you’ll need to manage the information flow so you do not disclose information that is not material to the investment decision but could compromise your bargaining position.
Misalignment of goals – The risk propensity of professional investors is typically quite different from that of entrepreneurs. Equity Investors are typically looking for big wins, so are likely to push a much riskier strategy than many entrepreneurs may be comfortable with.
Your position may become untenable – in some instances, the investor may believe that you, the entrepreneur, cannot take the business (which was your business) to the next level. You should also factor insurance to help cover losses from unexpected things that can go wrong.
As the above list illustrates, there are a number of significant drawbacks from securing equity investment. Whether they trump the benefits is largely for you to decide, with one prominent metaphor used by equity investors trying to tempt entrepreneurs being that, ‘it is better to have a smaller share of a bigger pie than a large share of a smaller (or diminishing) pie!’ Of course this argument is premised on the view that the investment will grow as a result of the business prospering.
It should be noted that the odds of a successful investment, regardless of terms agreed, are much more remote than many entrepreneurs believe. In terms of a rough estimate, over 90% of business plans are turned down by recipient equity investors, and out of the remaining 10% asked to pitch, approximately 1% get funded.
HOW DOES EQUITY INVESTMENT WORK?
It all starts with a business plan. A business plan is essentially a future orientated route map where entrepreneurs formalise how they intend to allocate resources so as to generate profits. While business plans have typically been associated with formal physical printed business plans, increasingly they exist as online documents. They are vital for any business seeking investment, as they are used to convey to prospective investors what the opportunity is.
In years past, the equity investment process typically consisted of loose informal networks whereby entrepreneurs were introduced to prospective investors through personal contacts. However, this process had a number of drawbacks, not least in that it was both time-consuming and highly inefficient. Nowadays, a prospective investor will typically want a business plan to be submitted to them. These investors will then review the plan and if they feel that the executive summary is sufficiently compelling they will then usually look to have the entrepreneur pitch to them. Modern variations have consisted of everything from ‘speed pitching’ to ‘pitch events’ where numerous parties from both sides of the table interact, rather than the strict 1:1 interactions of pre-Internet days.
The emergence of the Internet has meant that this matching process can now be undertaken in a much more efficient manner than before, and the network effect resulting from the growing number of groups serves to streamline the process even further and help increase the likelihood of a match between investors and entrepreneurs. In many ways, the process mirrors the growth of online dating sites such as Tinder in bringing different people together in pursuit of a common goal. However, given the nature of the interaction is more than mere funding, the personal 1:1 relationship nature of equity investment will remain important, even if the initial ‘flirting’ takes place online. It is also worth noting that investors are typically time-pressed investors who do not have time to wade through hundreds of pages of a detailed plan. A short plan with a strong executive summary is highly preferable to something as inaccessible and as lengthy as James Joyce’s Ulysses (no matter how good the underlying premise may be).
THE BUSINESS PLAN
A business plan plays a vital role in any interaction between entrepreneurs and investors, as it is typically the means by which prospective investors assess whether an investment opportunity exists or not. In many respects the business plan is a barrier; those without a business plan are generally not taken seriously.
Writing a business plan forces the entrepreneur to take a holistic view of their business so they can clearly describe the opportunity, while also demonstrating how they can take advantage of it. Being able to read a business plan is also a more effective way for the prospective equity investor to digest the idea in contrast to having to listen to someone ramble on about an idea in an unstructured manner.
WHAT SHOULD MY BUSINESS PLAN CONTAIN?
The business plan needs to clearly describe the amount of investment required and the percentage share in the business that you are offering in return. It should also describe what the investment will be used for and when repayment is likely. A business plan contains an executive summary at the start, and this is typically the area subject to most scrutiny. If the executive summary appeals, the investor is then likely to read the business plan in its entirety before inviting the entrepreneurs in to pitch to them. The main body of the business plan needs to cover a number of different sections, ranging from a company summary, to a marketing plan, to a sales forecast.
WRITING THE BUSINESS PLAN
There are a number of areas to watch out for when you are writing a business plan.
1. Describe the commercial opportunity clearly
Too many plans contain inaccessible language, technical terms and lazy language. This means using terms that are not well defined but are bandied around as if they were, such as “social media network”, “SAAS”, “cloud computing application”, etc. In terms of the financials, it is also important to temper enthusiasm by ensuring figures are grounded in reality and there are no hidden traps, such as profitability levels way in excess of the norm.
2. Write a succinct business plan
Ideally, the shorter the better - aim for 10-20 pages with Appendices as backup if needed (as well as a separate PowerPoint slide deck for presenting the plan). You should also factor insurance to help cover losses from unexpected disease outbreaks and other things that can go wrong in the agribusiness.
3. Excite the reader
Remember that the primary goal of the business plan is similar to that of a covering letter that accompanies a CV or résumé. It is designed to excite the reader such that they invite you in for a conversation. Many plans focus myopically on ‘the product’ without clearly defining the market, the route to market, finance requirements, the team, etc.
4. Take the business plan process seriously
Raising finance may be one of the most important things you do. While all entrepreneurs are in a hurry to make sales, writing a business plan is a difficult task and should not be produced without a clear understanding of what a business plan should look like, what sections you need to include, etc. Spending money on business plan writing service or a training workshop will be money well spent in the long run. Avoid a last minute business plan creation session at all cost!
5. Get external input
Another trait common with entrepreneurs is they keep their idea secret and only do a business plan at the last minute after they have spent a lot of money on equipment, product design, hardware, software and the like. Those that obtain frequent impartial advice are going to stand a much better chance of succeeding than those who avoid people who may ask hard questions. Often the reason entrepreneurs keep their cards close to their chests is on the spurious grounds that they fear that others ‘may run off with their idea’. Ideas are essentially worthless and the best form of defence for an idea is execution of your business plan.
While on the topic, it is worth noting that it is generally not worth asking recipients of your business plan to sign a Non- Disclosure Agreement (NDA), as most will simply refuse. For a start, NDAs are not easy to enforce and it is very rare for someone to have a completely unique idea, so the business plan recipient may have heard a similar idea before. Similarly, NDAs are time-consuming (as the terms need to be reviewed), add cost (particularly legal costs) and are viewed as unnecessary (after all, investors have their reputations to protect and it is not in their interest to disclose confidential information to third parties).
WHAT ARE EQUITY INVESTORS LOOKING FOR?
Let’s assume you have found an equity investor who liked your business plan. You now need to ensure that you have a good understanding of what the typical equity investor is looking for, so you can address these areas in your subsequent pitch.
First and foremost, equity investors are looking to make money. They will be looking to invest in a commercially viable opportunity which will appeal to a large target market, and which they perceive will have a high likelihood of success. While recognising that investment is high-risk, they are also aware that if they back a successful company, the returns can be very attractive. Given there is no such thing as a ‘typical investor’, the following list describing what equity investors usually look for is not exhaustive (nor do all of these points apply to all equity investors).
A great management team — They will be keen to assess the entrepreneur who had the original idea. Are they equipped to take the idea through planning and on to revenue generation? They will also have a preference for a strong team of smart individuals with a track record of ‘getting things done’, rather than a single entrepreneur, and in terms of personal characteristics, trust and integrity will also be very important.
An attractive investment opportunity — They will be likely to focus on investment opportunities in industries that they know. There are different perspectives on what level of return they will look for. A rough guide is 10 times the investment amount, returned within five years.
Scalability/exponential growth potential — The most attractive investments are ones in firms with the potential to enjoy explosive growth, without a commensurate cost increase.
A product — Most investors want to fund growth, not product development. If the investment proposal relates to a concept (rather than an existing product), the risk magnifies significantly and hence the terms agreed will reflect the risk.
Market size — The size of the target market is one of the most important elements for investors, as those opportunities where the market potential is large are naturally more appealing than ones with a limited market. This is one of the reasons that Internet-based offerings are particularly appealing, where you can make an argument that the addressable market size is large.
Traction/ evidence of demand/ real sales — Real sales are worth their weight in gold and historic sales data is far more valuable than sales forecasts. If you are bringing in revenue you are reducing the greatest risk. Those businesses with evidence of traction (be it user numbers, sales, or profits) and a large accessible market tend to command the most attention and best terms.
A defensible opportunity — Investors will want you to have some ‘unfair advantage’, be it a registered Trade Mark, the benefits of first mover advantage or some internal intellectual property that will help protect the market opportunity they’ll want to aggressively exploit. In economic terms, they generally prefer monopolistic opportunities as distinct from opportunities in very competitive markets. That said competition can also be a good thing as it tends to send a strong signal re the fact that a market exists.
Realistic valuations – Even if they like your business plan, the negotiations around the equity stake and its valuation can frustrate both parties and result in a commercial breakdown.
Some ‘skin in the game’ -- This phrase is akin to ‘putting your money where your mouth is’. Investors are likely to be more comfortable backing you if you have some investment in the entity also (as distinct from just ‘sweat equity’). This helps to ensure that your motives are credible and that both parties’ incentives are aligned. You should also factor insurance to help cover losses from unexpected disease outbreaks and other things that can gro wrong in the agribusiness.
Exit potential- Finally, equity investors will be very keen to understand the plans for exit from Day 1 (typically via a trade sale or sale to other shareholders).
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