Risk management in lending to smallholders and the

-Godwin Ehigiamusoe
Managing Director
LAPO Microfinance
 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 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
 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
 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:
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
 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
-Policy change
-natural disasters
 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
 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
 Effective portfolio and delinquency management
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
 Current low-flow of funds to the rural economy must be
 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.