-Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS.

Introduction: Limited credit to agriculture and Agribusiness. Contributions of small-holders and agribusiness Risk generating factors in agricultural lending Nature of risks in lending to agriculture Risk management approaches in agricultural lending

Early interest in provision of credit to agriculture was informed by the need to address rural poverty Government and development have initiated schemes to provide credit to agriculture and agribusinesses However the level of flow of credit to the rural economy is still very low. Private sector financial institutions are reluctant to support small-holders

Small-holders still dominate agricultural sector in Nigeria Small-holders are critical to food security ; they are responsible for provision of food consumed by the people Agriculture still provides employment for a large number of Nigerians Capacity of agribusinesses to do more is constrained by lack of access to finance

Risk is the possibility or chance of a loss. The key words are probability and loss. Risk therefore indicates possibility of occurrence of action or event that results in any loss which constrains achievement of set objectives. Risk Management process of managing the probability or the negative effect of the adverse event to an acceptable range or within the limit set by the lending institution in this case microfinance institution.

The principal objective of risk management strategy in agricultural lending is to enable the provision of diverse financial products and services for farming and agribusinesses through flexible approaches while at the same time mitigating exposure to financial and operational risks that could impact negatively on the operating results and the long term sustainability of the lending institution.

Vulnerability of Agriculture. Agriculture and agribusiness are vulnerable to: i. Adverse weather conditions as drought and floods. ii. Price fluctuation in local and international markets iii. Adverse policy shift

Poor Infrastructural Facilities in Rural Areas i. Absence of infrastructural facilities constrain efficiency of agribusinesses and farmers ii. Investment in provision of infrastructures constrain the level on return on investment and growth of agribusinesses iii. Lack of infrastructural facilities hinder effective monitoring by lending institutions thus resulting in credit risk

Low Population Density. Small settlements far apart: Hinders large business volume for lending institutions. This does not support financial viability and limits capacity to meet repayment obligations. Hinders effective loan monitoring and collection, thus resulting in credit risk

Nature of funded activities increases the probability of credit risk. i. Long loan duration make loan susceptible to adverse occurrences as droughts. Floods and fire outbreak ii. Cash-flow challenge as loan amount not utilized immediately at a point in the farming cycle could be prone to misapplication.

Political interference. Proliferation of politically motivated agricultural lending schemes distorts the market and diminishes credit discipline. This has collateral damage for privately capitalized lending institutions

Weak capacity of rural borrowers Weak capacity of owners and managers of agricultural projects and agribusinesses could put borrowed funds at risk of default. Failure of funded businesses as a result of poor management puts loan asset of lending institutions at risk

Credit risk. This refers to the probability of loss of loan income and loan portfolio due to loan repayment delinquency. Credit risk can be heightened by factors within and outside the control of lending institutions as poor lending policies, adverse weather and poor management.

Portfolio risk This refers to the risk associated with the structure and composition of the loan portfolio Common portfolio risk factor is concentration of sizeable proportion of loan assets in either in particular economic activities (eg cassava ) or in specific geographical areas (eg one region/state).

Operational risks Operation risk arises out of inadequacies of persons, operational procedures and equipment and informational management systems involved in services delivery. Operational risk could result from: late, incorrect and incomplete reports; poor client screening and poor portfolio management procedures.

External Risks Lending institutions and their borrowers operate in wider environment, which often exerts influence and pressure on their operations and performances. Common external risks are: -Policy change -natural disasters -conflicts

Serial Disbursement. Serial disbursement of approved loan amount helps borrowers to manage their cash-flow and thereby prevent misapplication of loans. The approved amount is disbursed in instalments. For example, if N200, 000 is approved for a farmer, an estimated amount for first series of activities as land preparation, purchase of seeds and other farming inputs. 60% of the loan amount in this case N60, 000 can be disbursed to the borrower. The balance of 40% or N40, 000 could be disbursed well into farming season for activities as weeding and harvesting.

Modified installmental repayment schedule. While it is not appropriate to require repayment of equal instalments from farmers it is however possible to adopt modified installmental repayment. Borrowers are required to make regular repayment of total amount of 30% of the loan amount and due interest during the farming period. Repayment of this proportion of the loan amount could be made from non-form activities. The outstanding amount which is 70% is required to be made at harvest.

Establishment of sub-branches Such sub-branches bring services closer to targeted communities with minimal cost. Simple operations in the sub-branches are carried out by few staff largely drawn from the locality.

Insurance cover Natural disasters as floods and droughts are beyond the control of borrowers and the lending institution. These risks and others which include fire out breaks are transferred to insurance companies. In Nigeria there is National Agricultural Insurance Company (NAIC),

Supplementary services for borrowers. Small-holders require support to be able to properly utilize borrowed amounts as well as earning adequate returns on their efforts. Such support includes creation of access to improved seedlings, modern farming techniques, inputs, storage facilities and marketing channels.

Effective credit policies. Lending institutions must have clear and appropriate credit policies and guidelines. Issues as client identification, loan application appraisal, loan approval and monitoring procedures must be properly outlined. This is to avoid actions with negative consequences for repayment performance. Credit staff must be able to assess debt capacity of potential borrowers.

Effective monitoring, Monitoring is crucial to success in agricultural lending. This consists of loan utilization monitoring and consistent assessment of performance of credit staff. An important aspect of monitoring is loan utilization. Credit staff must ensure that borrowers utilize borrowed funds in intended projects.

Effective portfolio and delinquency management procedures. Effective Portfolio management system is essential in managing credit risk. There is need for efficient management information system for effective portfolio and delinquency management. If key portfolio quality indicators as ratio of non-performing loans and arrear rates are not correctly determined and properly managed, the lending institution is exposed to credit risk.

Clear portfolio diversification policy Lending institutions must formulate policy for portfolio diversification. Periodically credit staff must assess the current of portfolio concentration. Limits must be set for portfolio concentration along sectors, regions, loan sizes and types.

Current low-flow of funds to the rural economy must be addressed. Lending institutions must make commitment to provision of Credit to Small-Holders and Agribusinesses. Lending institutions should devise innovative approached to provide financial services to low-income people.