IFN Monthly Article on Nigeria: February 2018 Issue

Nigerian agriculture enterprises to get concessionary Islamic funding

In February 2018, the Central Bank of Nigeria (CBN) amended the guidelines for its Commercial Agriculture Credit Scheme (CACS) to include Islamic banks. CACS was originally launched in 2009 by the CBN in collaboration with the Federal Ministry of Agriculture and Water Resources to provide concessionary funding to agricultural enterprises. The scheme aims to increase agriculture output, create jobs and enhance food security by funding agriculture production, processing, storage, input supplies and marketing. As at year end 2017, the CBN had disbursed N551.18 billion ($1.8 billion) to 547 agriculture projects across the country through CACS. For almost 10 years, this laudable scheme was restricted to interest-based lending and channelled almost exclusively through conventional banks to the exclusion of Islamic finance institutions.

The recent amendment to the CACS guidelines is yet another milestone for Islamic finance in Nigeria as it demonstrates broad recognition of the role of Islamic banks in achieving financial inclusion. It also demonstrates the flexibility of Nigeria’s regulatory regime to accommodate Islamic banking products. Under the revised guidelines, the CBN will extend funding to agriculture enterprises, including small scale farmers, through Islamic banks while utilising popular Islamic finance contracts such as Murabahah, Salam, Istisna’, Ijara and Wakalah. The CBN will enter a profit sharing agreement with participating institutions to share the target profit of 9%, where 22% of the profit will accrue to the CBN and 78% to the participating Islamic bank. The guidelines require the Islamic bank to bear the full credit risk of repayment by beneficiaries.

With the new guidelines, Islamic banks will now have access to the CACS and will be able deepen their penetration, particularly in Nigeria’s northern region, which has a large agrarian Muslim population. In 2017, Nigeria’s agriculture sector contributed 21.06% of the country’s $372 billion gross domestic product and employed 48.19% of the country’s workforce. Agriculture is therefore pivotal to economic growth and is also regarded as the key solution to the country’s perennial over reliance on oil export earnings. The government has made several attempts to stimulate the sector through initiatives such as fertilizer subsidies, provision of improved seedlings and extension services. In our view, the extension of concessionary credit schemes using Islamic finance contracts would serve the dual purpose of increasing access to much-needed funding to previously excluded farmers, while increasing patronage of the nascent Islamic financial services industry in Nigeria.