Key Challenges in Agricultural Lending
Commercial banks in Nigeria have identified several critical challenges that limit their willingness to provide loans to the agricultural sector. These include high risks, weak infrastructure, and market uncertainties, despite growing calls for increased financing for farmers.
The President of the Association of Corporate Affairs Managers of Banks (ACAMB), Rasheed Bolarinwa, highlighted that while banks recognize agriculture as vital for food security and economic growth, they remain cautious due to the unique challenges within the sector.
“Banks are all agreed on the need to support agriculture to achieve self-sufficiency in food production. However, the challenge is more around the peculiarities of the agric business and the unique challenges within the sector,” Bolarinwa stated.
He emphasized that many banks are interested in agriculture because of its importance to the economy, but they are also cautious due to high-risk factors, repayment issues, operational risks, and market uncertainties.
Risks Associated with Agricultural Lending
Agriculture remains one of the riskiest sectors for lenders because many of the challenges faced by farmers are beyond their control. These include climate-related risks such as flooding or drought, pest and disease outbreaks, commodity price fluctuations, insecurity in farming communities, and weak infrastructure affecting storage and logistics.
While intervention schemes such as the Agricultural Credit Guarantee Scheme Fund helped reduce risks for lenders, they did not completely shield banks from losses. “While the guarantee scheme helps to de-risk the risk factors, it does not eliminate risk. Banks are still exposed to part of the loss, while recovery under guarantee schemes can sometimes be lengthy due to administrative constraints,” Bolarinwa explained.
Collateral and Risk Management
On the issue of collateral requirements, Bolarinwa maintained that banks had a responsibility to protect depositors’ funds and ensure prudent lending practices. “Banks have a responsibility to protect depositors’ funds, so credit decisions must balance financing risks with adequate mitigants and prudent risk management. Traditional collateral remains important, especially where reliable financial records or alternative risk assessment tools are limited.”
Collateral also serves to ensure that farmers have skin in the game and remain committed to the orderly functioning and repayment of the loans.
Alternative Financing Models
However, Bolarinwa noted that financial institutions were beginning to adopt alternative financing models for farmers without conventional collateral. “Yes, there is growing consideration for alternative credit models, although adoption is still evolving. Some financial institutions and ecosystem players are using value chain financing, warehouse receipt financing, aggregation-based lending, and cash flow-driven lending to support farmers who lack traditional collateral or formal credit history.”
These models are still developing and have not yet fully replaced conventional collateral requirements across the industry.
Market Volatility and Structural Challenges
Market volatility also continues to influence banks’ willingness to lend to agriculture. “Market volatility significantly affects lending decisions because it impacts farmers’ revenues and repayment capacity. Sharp movements in commodity prices, foreign exchange pressures, and inflation can quickly alter the economics of farming operations, making cash flow projections less predictable,” Bolarinwa explained.
He further attributed the low share of agriculture in total bank lending to structural challenges within the sector. “The gap has persisted largely because agriculture remains a high-risk sector relative to many others. In addition to sector-specific risks, there are structural issues such as weak data availability, fragmented value chains, low insurance penetration, and limited infrastructure, all of which constrain scalable lending.”
Improving Access to Finance
Bolarinwa said banks were increasingly pursuing partnerships and digital initiatives to improve farmers’ access to finance. “Banks are becoming more deliberate in supporting agriculture through partnerships with development finance institutions, digital lending initiatives, risk-sharing arrangements, cluster financing, and tailored products for different agricultural value chains. There is also more focus on capacity building, financial planning, and deployment of technology for monitoring and collections.”
Government Support and Policy Interventions
Bolarinwa called for stronger government support and policy interventions to encourage lending to the agricultural sector. “Stronger policy support would further encourage lending to the sector. Key areas include more effective credit guarantees, expanded agricultural insurance coverage, provision of energy and infrastructural support, mechanisation of farm equipment, and the institution of supportive policies that reduce market and pricing uncertainties.”
CBN’s Role in Agricultural Lending
The Governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso, recently emphasized that agriculture must assume its “rightful place in our financial system and national priorities” amid concerns that the sector still accounts for less than five per cent of total bank lending in Nigeria.
Cardoso observed that although agriculture contributes over one-fifth of Nigeria’s Gross Domestic Product and provides employment for a significant portion of the population, the sector continues to suffer from inadequate funding. He explained that the Agricultural Credit Guarantee Scheme Fund, which guarantees up to 75 per cent of agricultural loans, was established to encourage banks to extend credit to farmers, including those often regarded as unbankable.
Farmers’ Concerns
In response to this initiative, the President of the All Farmers Association of Nigeria, Mohammed Magaji, expressed concern over poor access to agricultural financing, accusing commercial banks of being unwilling to lend to farmers despite the availability of the Agricultural Credit Guarantee Scheme Fund.
