-godwin ehigiamusoe managing director lapo microfinance risk management in lending to small-holders...

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

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Page 1: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

-Godwin EhigiamusoeManaging DirectorLAPO Microfinance

RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND

AGRIBUSINESS.

Page 2: -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 agricultureRisk management approaches in

agricultural lending

Page 3: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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

Page 4: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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

Page 5: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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’.

Page 6: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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.

Page 7: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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

Page 8: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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

Page 9: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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

Page 10: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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.

Page 11: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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

Page 12: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

Weak capacity of rural borrowersWeak 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

Page 13: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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.

Page 14: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

Portfolio riskThis 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).

Page 15: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

Operational risksOperation 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.

Page 16: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

External RisksLending 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

Page 17: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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.

Page 18: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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.

Page 19: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

Establishment of sub-branchesSuch sub-branches bring services closer totargeted communities with minimal cost.

Simpleoperations in the sub-branches are carried

outby few staff largely drawn from the locality.

Page 20: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

Insurance coverNatural 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),

Page 21: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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.

Page 22: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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.

Page 23: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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.

Page 24: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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.

Page 25: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

Clear portfolio diversification policyLending 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.

Page 26: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS

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.

Page 27: -Godwin Ehigiamusoe Managing Director LAPO Microfinance RISK MANAGEMENT IN LENDING TO SMALL-HOLDERS AND AGRIBUSINESS