By Jeff Kaiser
After a hectic week in Nigeria that included meetings with six small- and medium-sized (SME) agricultural processors, two multinational corporations working in agriculture, three banks, 15 smallholder farmers, and one of Nigeria’s State Commissioners for Agriculture, I was sure of one thing: the country’s agricultural enterprises desperately need better financing options.
The SMEs we met with in particular articulated a need for longer term loans and other financial products with fewer strings attached. Many of these businesses are too large to receive loans from microfinance institutions and unable to meet the strict collateral requirements or short repayment terms of commercial banks. This lack of access to finance isn’t just stifling the growth of these agricultural enterprises; it is also preventing Nigeria from fulfilling its true potential for agricultural production and food security.
I went to Nigeria as part of a Dalberg team to design a new investment fund focused on overcoming these financial obstacles in the agriculture sector. The fund, called the Fund for Agricultural Finance in Nigeria (FAFIN), had its first close in late January, which means it is ready to start investing.
Before FAFIN could exist and start serving Nigeria’s agriculture sector, my team had to answer a lot of questions. We started with the most basic: why don’t appropriate financing options currently exist for most agricultural SMEs in Nigeria?
Part of the problem is that Nigerian banks are generally unwilling to provide long-term debt financing to farmers and agricultural businesses. Nigeria is a fast-growing country with significant oil wealth. Banks can comfortably fill their commercial lending portfolios with deals in real estate, construction, telecommunications, and oil and gas, with lower perceived risk than lending to the agriculture sector. Though some banks are increasing their lending activity in the agriculture sector (in part due to government policies designed to catalyze this lending), thus far they have focused on lending to larger and more established companies. Few, if any, alternative financing options—e.g., private equity, venture capital, or even foreign investment—are available to agricultural businesses.
Agriculture is the backbone of Nigeria’s economy, accounting for over 42% of GDP and roughly 60% of employment (and Nigeria is Africa’s largest country by population, home to about one out of every seven Africans). Yet despite the economic importance of Nigeria’s agriculture sector to both country and continent, its potential is far from realized. Use of machines, improved seeds, and fertilizer is low, resulting in poor crop yields. Storage and transport infrastructure are insufficient resulting in massive post-harvest losses and spoilage. Additionally, millions of hectares of arable land remain uncultivated. As a result, Nigeria imports over $11 billion in staple crops every year.
Many of these problems are directly linked to insufficient finance. There is an enormous gap between supply and demand for agricultural finance in Nigeria, estimated at a minimum of $4 billion annually and possibly much greater. SMEs suffer from one of the largest finance gaps; we estimate the demand for finance among these businesses to be 10 to 15 times the current supply.
It is this particular gap in long-term growth finance for agricultural SMEs that FAFIN aims to fill. If the fund succeeds, it will allow enterprises to grow, creating new revenue, jobs, and opportunities for smallholder farmers. Furthermore, by demonstrating the profitability of investing in agriculture, FAFIN aims to “crowd-in” other private investors who can catalyze further agricultural development.
FAFIN emerged out of a unique partnership between three anchor investors: the Nigerian government, through the Federal Ministry of Agriculture and Rural Development and Federal Ministry of Finance; the German development bank KfW, on behalf of the German Ministry for Economic Cooperation and Development; and the Nigeria Sovereign Investment Authority. As the only Nigerian investment fund focused exclusively on agriculture, FAFIN will provide tailored finance and technical assistance to investees, ensuring their ability to thrive. The fund will offer longer-term, flexible financial products like structured royalties and convertible debt, as well as some direct equity and traditional debt. Seasoned investment professionals from Sahel Capital Partners who have experience both in Nigeria and in agriculture will lead the fund’s operations.
According to the founder of one mid-sized agricultural processing company, “Nigerian agricultural businesses are transforming. There were a lot of problems before, but now we are ready to take off, and we need investors who are willing to contribute expertise to move our businesses forward.” I hope FAFIN will be the first of many initiatives to support these fast-growing businesses and spur private development of Nigeria’s agriculture.