COMPETITIVENESS ECONOMIC DEVELOPMENT STRATEGYpdf.usaid.gov/pdf_docs/Pnadi757.pdf · Macroeconomic...

PromotingImproved SustainableMicrofinance Services

COMPETITIVENESS ECONOMIC DEVELOPMENT STRATEGY

Submitted by:

Chemonics International Inc.

In collaboration with:

Development Associates, Inc. Freedom From Hunger

International Technology Investment, Ltd. Value-Add LLC

A USAID-funded Activity Contract # 620-C-00-04-00037-00

June, 2004

CHEMONICS INTERNATIONAL INC.

COMPETITIVENESS ECONOMIC DEVELOPMENT STRATEGY i

TABLE OF CONTENTS

A. INTEGRATING FINANCIAL AND RURAL DEVELOPMENT PROGRAMS ........................ 1

1. Introduction................................................................................................................................. 1

USAID ......................................................................................................................................... 1

Government of Nigeria ................................................................................................................ 1

PRISMS ....................................................................................................................................... 1

2. Achieving Results through Implementing Partners .................................................................... 2

3. Operating Environment for Economic Development and Agricultural Growth......................... 3

The Significance of Agriculture................................................................................................... 3

Nigeria’s Competitiveness Challenges ........................................................................................ 4

Macroeconomic Perspective and Policy Reform Initiatives........................................................ 4

Nigeria’s MSME Sector............................................................................................................... 5

Nigeria’s Financial Sector MSME Initiatives.............................................................................. 6

The Challenges of Financing Agriculture.................................................................................... 8

B. NEW PARADIGMS FOR AGRICULTURAL DEVELOPMENT AND RURAL FINANCE .... 9

1. Installing a Focus on Competitiveness ....................................................................................... 9

2. How MSMEs work within Commodity Marketing Chains ...................................................... 12

3. Economic Clusters .................................................................................................................... 16

C. DEFINING IMPLEMENTATION FOCUS AND SCOPE ......................................................... 17

1. Impact through Competitiveness .............................................................................................. 17

2. Impact through Models ............................................................................................................. 18

3. Impact through Collaboration ................................................................................................... 18

4. Guiding Principles .................................................................................................................... 18


COMPETITIVENESS ECONOMIC DEVELOPMENT STRATEGY 1

A. INTEGRATING FINANCIAL AND RURAL DEVELOPMENT PROGRAMS

1. Introduction

This guide is designed to present the principals and framework of a competitiveness approach to

economic development targeted at micro, small and medium enterprises working within a

business value chain that is demand driven. It assumes that the private sector is the engine of

growth, and that the government’s role is to create and sustain an appropriate enabling

environment, including policy, regulations, infrastructure, and macroeconomic programs that

enhance the private sector’s ability to compete in a local, regional, and global context.

The objectives of this guide are two fold:

• To introduce the PRISMS approach to creating competitive private sector economic

growth to a wide audience of stakeholders; and,

• To create a roadmap that others can join in one, thus building the critical mass of support

in creative thinking, resources, and leadership needed to move Nigeria into its

comparative potential as a nation with powerful agro-industries, creating jobs, providing

economic diversity, and improving livelihoods.

USAID

Promoting Improved Sustainable Microfinance Services (PRISMS) is a USAID financial sector

development activity focused on achieving “Improved Livelihoods in Selected Areas.” PRISMS

is designed to serve as an effective tool for increasing financial flows to targeted agro-industries

in ways that result in increased rural incomes, expanded micro, small, and medium enterprise

(MSME) activity, and in strengthened and sustainable policy and institutional frameworks for

financial activity, particularly at the microfinance level.

Government of Nigeria

The “National Economic Empowerment and Development Strategy” (NEEDS) lunched by

President Obasanjo in March 2004 identifies MSMEs as the engine of growth for the country.

GON wants to ensure that the various NGOs, community banks, financial and non-financial

intermediaries constituting the fabric of the MSME financial services industry play a sustainable

role as resource providers, while ensuring protection of public financial resources.

PRISMS

Three operating components position PRISMS to contribute to USAID’s strategy for economic

development, and the government’s NEEDS vision for the future of Nigeria.

Improved Environment for MSME Finance

PRISMS supports activities aimed at achieving changes in the policy, legal and regulatory

environment for MSME finance. Working in conjunction with the Central Bank of Nigeria and

through a Financial Sector Forum of financial decision makers from both the private and public

sectors, PRISMS will support development of a roadmap for an integrated financial sector

policy, and a companion agenda for change from historical supply led development to a demand



led model that will lend maximum support to private sector initiative, creating the environment

for dynamic growth and global competitiveness to take the lead.

Expanded Growth in Target Clusters

PRISMS supports formation of economic clusters in target commodity sectors and geographic

areas to promote expansion of MSMEs and financial flows. Activities will help cluster partners

to identify and pursue business initiatives, and build private-public partnerships that pilot new

approaches to MSME development and finance. PRISMS provides access to technical assistance

and training to strengthen finance institutions and non-financial intermediaries critical to

implementation of cluster initiatives.

Strengthened Private/Public Partnerships PRISMS facilitates partnership arrangements: between PRISMS and other development projects

in support of cluster initiatives; between business entities operating within target commodity

chains; and between business and government in support of cluster initiatives. PRISMS places

priority on developing partnerships that generate and leverage resources and results.

2. Achieving Results through Implementing Partners

To realize its goals – and potential – with regard to economic diversification, Nigeria needs to

turn its comparative advantages in agriculture into competitive strengths. This requires more

intensive focus on looking outward to regional and global markets and on developing market-

driven national business strategies that provide the basis for allocation of strategic national

resources. The building blocks for competitiveness can be put into place by forming economic

clusters in target commodity subsectors around business linkages. Natural business linkages

build demand-supply relationships between processors and producers that attract financial

participation, and bring about value-added results for all participants. PRISMS can support the

competitiveness focus by developing and operating from within a competitiveness paradigm in

USAID’s target commodity subsectors, and by developing economic clusters that provide

models for leverage and replication.

Achievement of results requires PRISMS to develop and implement cluster activities in target

commodity and geographic areas, even as the project works to support evolution of an enabling

environment that will support increased and sustainable financial flows to MSMEs. PRISMS will

work to achieve national-level impacts by working with and through the Central Bank of Nigeria

and its specialized departments (DFID and OFID) and the PRISMS Financial Sector Forum, a

group of intellectuals from the private and public sectors as well as academia, to set out an

agenda for a financial system that will provide maximum support for private sector-led growth.

On the other hand, PRISMS will focus on forming economic clusters in target commodity

chains. Major partners within clusters will include: producer and processor associations, and

other non-financial intermediaries; community banks and/or other financial institutions;

industrial buyers; and the relevant public sector partners. These cluster members and their

constituents, including employees and producer households, represent the direct beneficiaries of

PRISMS assistance.



Percent Sectoral Composition of GDP 1965 and 2001

Sector 1965 2001

Agriculture 68 43

Oil 8 13

Manufacturing and Construction

5 8

Services 19 36

Total 100 100

Source: USAID 2003a, p.3.

3. Operating Environment for Economic Development and Agricultural Growth

In this section we look briefly at major characteristics of the Nigerian operating environment that

define the framework for PRISMS. These include, among others: challenges faced by Nigeria as

it seeks to develop its commodity subsectors to achieve new levels of national, regional and

international competitiveness; conditions within the macroeconomic environment, and new

openness to reform of policies and regulations that inhibit private sector growth; the status of

financial sector and MSME activities; and the particular challenges in MSME development and

financing within the agricultural sector.

The Significance of Agriculture

Nigeria has an untapped comparative advantage in the production of a variety of crops and

livestock enterprises in different agro-ecological zones. The type of agricultural system (crop or

livestock production), as well as the level of intensification, is influenced by the level of

technology and financial resources available for the private sector to undertake commercially

sustainable operations – in each of Nigeria’s six major agro-ecological zones. The range of

competitive food crops produced includes, but is not limited to, groundnuts, maize, millet,

sorghum, soybeans, yam, cassava, pineapple, banana, mango, beans and vegetables. Nigeria’s

tree crops include cocoa, oil palm, rubber and timber.

The importance of the agricultural sector in

Nigeria is often underestimated, especially

relative to oil. Agriculture commanded 68% of

the Nigeria’s GDP in 1965, while oil stood at

only 8%. In the next 26 years, agriculture

dropped to 43% of GDP, while oil rose, but only

to 13%. Oil still only represents 30% of

agriculture’s contribution to the national income,

as of 2001. See the adjacent table. Crop

agriculture accounts for 80% of total agricultural

GDP; livestock production contributes a 13%

share.

Agriculture remains the dominant employer with 70% of the population dependent in some way

upon agriculture for their livelihoods in Nigeria. Yet, in spite of its dominant position in both

GDP and employment, the Nigerian agriculture sector cannot meet the needs of the growing

Nigerian population. While the population has grown at 3% per annum over the last five years,

food production has increased only by 1.5% (Ikpi 2001). Nigeria’s food self-sufficiency ratio has

decreased from a 98% level in the early 1960s to about 50% at present. Nigeria’s future ability to

address this food self-sufficiency gap is directly related to the country’s ability to develop and

implement multi-pronged solutions: closing the gap through adoption of improved technologies

for production – storage, processing and distribution – and timely availability of inputs, market

information and finance; while, at the same time, transforming the subsectors in which Nigeria

has most potential into regionally, and globally, competitive national industries, within which

farming – as a business – becomes a profitable way of life for producers, processors and

manufacturers alike.



Perhaps most critical is the need for Nigeria to put into place new paradigms to guide agricultural

growth – adopting a focus on global competitiveness, rather than the current focus on factor

inputs – to guide project design and decision making. The assessment carried out by PRISMS

supports the need for such a paradigm shift, beginning with more focus on marketplace

positioning and on creating innovative linkages within commodity marketing chains, that lead to

new forms of demand for both financial and non-financial services.

Nigeria’s Competitiveness Challenges

The World Economic Forum ranks countries in terms of their ability to compete. The

benchmarking for countries participating in the activity is done against criteria that measure the

country in terms of such things as the quality of its public institutions, approaches to governance

and status of technology and innovation. A major part of the ranking is provided directly by

representatives of the country’s business community who are asked, each year, to respond to an

Executive Opinion Survey – a vehicle through which they rank the country and the character of

its institutions and its policies with regard to, e.g., investment, technology transfer, finance, etc.

The executives who complete the survey are selected in proportion to their sector’s contribution

to Nigeria’s GDP. While experience shows that the ranking process, particularly in developing

economies, is not yet an exact science, the rankings do provide a benchmark for country

performance that can be used both in Nigeria and by potential investors.

Nigeria’s competitiveness rankings – both its overall Global Competitiveness Ranking (GCR)

and its Business Competitiveness Index ranking – fell from 2002 to 2003. Nigeria’s overall GCR

actually fell by 15 points, effectively placing Nigeria below countries such as Kenya, Malawi,

Tanzania, and Ghana, none of which have access to oil revenues to support growth. However,

Nigeria’s rankings belie its economic potential, and it is considered an under-performer. It is

incumbent on Nigeria to use its oil to fuel broad-based growth, not through continued subsidy,

but by putting into place a private-sector led approach to growth and competitiveness that can

lead to the transformation of commodity sub-sectors into national industries over the next 20

years – before forecasted global oil production declines making a national diversification policy

more difficult.

Macroeconomic Perspective and Policy Reform Initiatives

In March 2003, President Obasanjo announced the “National Economic Empowerment and

Development Strategy” (NEEDS), which also represents the country’s Poverty Reduction

Strategic Paper (PRSP). Agricultural growth through commercialization and support for

Nigeria’s micro, small and medium-sized enterprises (MSMEs) are core elements of NEEDS.

Within NEEDS, the GON is responsible for providing a general policy framework, including

favorable macroeconomic policies for agricultural and rural development and for the guidance of

all stakeholders. State and local governments are directed to provide support to private sector

initiatives, and organize and provide effective extension and infrastructure development services

in support of expanded growth. The private sector is expected to take advantage of an improved

enabling environment by structuring profitable agricultural investments.



Over the past several years the Federal Government has initiated institutional reforms to improve

the environment for MSME growth, which contributes NEEDS’ objectives and priorities.

Reforms include the financial enabling environment – exemplified by the restructuring of public

sector banking activities – and policies that support the expansion of financial services through

the private community banking structure. On the business development side: the Nigerian

Investment Promotion Commission was restructured to be more pro-private sector-led, both in its

management and Governing Council leadership; the Small and Medium Enterprises

Development Agency of Nigeria (SMEDAN) was established in 2003 to give policy direction to

the sector.

Nigeria’s MSME Sector

Most Nigerians derive their income from a combination of agricultural activity and operation of

an MSME (USAID/Nigeria PRISMS contract section C-3.). Statistics on the number,

geographical distribution, and activities of the MSME sector are unreliable, but it is estimated

that MSMEs comprise 87% of all firms operating in Nigeria. Using poverty statistics published

by the Federal Office of Statistics, it has been further estimated that the number of MSMEs in

Nigeria could be between 7.0 and 8.4 million (ACCION International 2003, p.8; PRISMS

Assessment Report, 2004). If farmers were to be organized within effective enterprises, that

number would escalate greatly.

Source: World Bank PAD, 2003

Based on global and regional averages, as well as familiarity with the Nigerian MSME sector as

it exists today, the number of microenterprises may comprise 80% of the total number of

potential MSMEs (approximately 6.7 million), small businesses may account for 15% of the total

(about 1.3 million), and medium enterprises may comprise 5% of the total MSMEs, or around

420,000 (PRISMS Assessment Report). Farmers are not currently part of the MSME sector

MSME Characteristics

Microenterprises Small Businesses Medium Enterprises

Skills Low: Uneducated but dynamic. Sole ownership

Medium: Have technology competence, engage in training and invest in apprenticeship system. Basic education at the very least High School Leaving Certificate or Trade Technical Certificate

High: Undertake technology upgrading, design adaptations in response to market. Highly educated, often with a university degree or higher

Technology None to Low Low to Medium Medium to High

Competition Medium to High High Medium to High

Products

Retail, Arts and Crafts, Textiles, Services, e.g. salons, tailoring

Manufacturing, Chemicals and Pharmaceuticals, Organized Retail

Telecom, IT, Specialized Retail Service e.g. restaurants, entertainment

Markets Local Local, National, Regional Local, National, Regional

Links with BDS Providers and Other Support Institutions

Very Limited: few links with donor-sponsored providers

Limited: some links with donor and private sector providers complemented by in-house technical training, accounting and some routine functions, e.g. legal, management and technical consultancy

Extensive



because, for the most part, they are not organized within associations and/or organizations that

are structured to operate as MSMEs within commodity chains. Yet this is the direction that

Nigeria’s rural development efforts must take.

The chart on the previous page, which was adapted from work done by the World Bank,

illustrates the levels of skills, technology, competition, etc. that differentiate sizes of businesses.

From PRISMS’ perspective, it is instructional to note that farm-related enterprises do not appear

at all – including trading, primary and secondary processing firms, and input marketers – even

though all of these represent MSMEs of various sizes that operate within agricultural commodity

chains.

MSME Financial Services Demand-Supply Gap

The GON has a long history of providing supply-led, subsidized MSME finance that has resulted

in extremely limited access to requisite finance and financial services. For example, out of an

estimated total of 8.4 million MSMEs in Nigeria less than 10% has access to needed finance.

These figures point to the large gap that exists between MSME demand for and the supply of

finance and financial services. In fact, Nigeria faces a very large gap in the supply of “missing

middle” loans to SMEs – those ranging from N50,000 to N500,000. Microentrepreneurs,

including traders, often require as little as N5,000 -10,000, but commercial banks, and even

many community banks, cannot afford to make such small transactions as long as they continue

to follow their current banking practices. There are currently a few commercial banks interested

in piloting MSME lending programs. The most plausible option for commercial banks to be

actively involved in MSME financing, particularly with regard to microenterprise financing,

appears to be the wholesaling funds to intermediaries – including community banks – which will

in turn retail to the smaller clients.

Nigeria’s Financial Sector MSME Initiatives

The current status of financial sector actors, particularly with regard to MSMEs, provides

another set of factors that defines the PRISMS approach to design and implementation. The

Nigerian financial sector is comprised of the money market, with commercial banks and the

discount houses as the major players; the capital market, with the stock exchange, issuing houses

and/or stock-broking firms as the major players; and the insurance market, comprising the

insurance companies and the insurance brokers. Virtually all financial services delivered to

MSMEs take place within the money market, but as the assessment study indicated, these

deliveries represent less than 10% of the effective demand for financial services by MSMEs.

Central Bank of Nigeria

The Central Bank of Nigeria (CBN), as the apex of the Nigerian money market, regulates and

supervises the activities of 90 licensed commercial banks, 282 licensed community banks, 6

discount houses and more than 100 finance companies. The CBN also has responsibility for

regulating the three Development Finance Institutions (DFIs); however, supervision of the DFIs

is vested in related government ministries that have their own, generally subsidy based,

development agendas. The difference in role and free-market orientation between these

ministries and the CBN creates problems in controlling activities of the DFIs, at a time when the

CBN has fully liberalized the money market – as far as the pricing and allocation of credit is



Community Bank Loans vs. Deposits

31 Dec 2003

(N'000)

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

20,000,000

Total Loans and Advances Total Deposits

concerned – so as to leave the cost and disbursement of funds to be determined by unsubsidized

market forces. The importance of this liberalization is diminished by the huge gap between

demand and supply in MSME financial services; closing the gap will require discontinuance of

subsidies, improved financial discipline, continuing development of the long-term capital

market, and smoothing of the regulatory environment.

Commercial Banks

Commercial banks constitute the single largest segment of the Nigerian financial system, yet few

of them lend to MSMEs because of the perceived risks involved, their own lack of capacity to

develop financial products and services appropriate to MSME clients, and the high cost of

providing services to individual MSMEs, as opposed to developing wholesaling mechanisms.

High bank interest rates – fueled by GON over-borrowing, inefficient capital markets, and

commercial bank inefficiencies – coupled with traditional collateral requirements that most

MSMEs cannot provide, make it prohibitive for MSMEs to access credit.

Community Banks

Community banks are private unit

banks, having only one branch in

one location. They are licensed

and regulated by CBN/OFID. In

general a larger part of their

portfolio consists of loans going to

MSME clients, most located in

rural and peri-urban areas. Most

clients appear to be small savers as

evidenced by the fact that the

community banks had 804,806

deposit accounts on a combined

basis, compared to only 59,805 borrowers at 2003 year end. Savings account for over 60% of

total deposits.

Given present realities, the most attractive supplier of “formal” financial services to micro and

small customers appears to be community banks. While their combined borrowers in 2003

numbered somewhat less than 60,000 (on average just over 100 borrowers per community bank),

they represent significant potential. They are spread throughout the country, and licensing

requirements are relatively low, so that as markets develop, new banks will emerge. Since they

are regulated by the CBN, licensed community banks make more attractive candidates for

linkage with commercial banks. They have a stake in developing the communities in which they

are located, so although their processes and collateral requirements remain difficult for many

MSMEs, they can, with assistance, scale

down their banking practices to meet the needs of their target markets. Their liquidity makes

them good potential partners for development efforts, if such efforts are packaged to help

community banks translate these liquidities into risk assets.



The Challenges of Financing Agriculture

Agriculture and MSME financing are closely linked within the context of the financial structure

just described, and the context for PRISMS as defined by USAID/Nigeria. Current microfinance

practices reach only limited numbers of NGO MFI clients, cooperatives, organized societies, and

informal lending group members engaged in microenterprise activities. Although statistics on the

size of the unserved and underserved population are not available, it is in the millions. One has

only to focus again on Nigeria’s 30 million cassava farmers, plus the millions involved in rice

and sorghum. The challenge is to find ways to adapt best practices in microfinance so that they

can be brought to bear on the needs of these farmers.

New approaches to MSME finance

PRISMS assessment showed a clear disconnect between the needs for financing within Nigeria’s

critical commodity subsectors and the ability of the actors within commodity subsectors –

thousands of whom are subsistence farmers working on small plots of land – to access financial

and non-financial services. Of the 70% of the Nigerian population employed in the agricultural

sector, 90% operate at the subsistence level. The majority of them are not members of effective

producer organizations. This situation has worsened over the last 30 years, making it difficult to

reach them with necessary institutional finance to expand or upgrade their operations, adopt

improved practices, or procure inputs to boost productivity. To a large extent, their future has

been left to the government extension/subsidy/supply system (effectively a poverty trap). Most

of them rely on informal sources of finance, often at usurious rates, and/or depend upon traders

to buy their crops at rates that are often unfair. In another twist, farmers who themselves are poor

are often made poorer by traders who take product and ask farmers to wait for payment, thus

effectively using farmers to float their businesses.

Microfinance, as that word is used and understood by microfinance practitioners, does not serve

farmers directly at all. Strictly speaking farmers are not considered microentrepreneurs, even

though an individual who is part of an affinity group affiliated with an NGO MFI may have a

microenterprise that consists of taking her farm production to the local market for sale. The

bottom line here is that the segment of the population upon which commercialization of

agriculture rests is currently not effectively reached by formal MSME financing mechanisms.

And microfinance as it is currently practiced in Nigeria is not adequate to the task of breaking

the cycle of poverty faced by the producers, who are key to both rural economic development

and agricultural development.

Integrated Financial Sector Approach to Agricultural Finance The graphic below provides a conceptual framework for a sustainable financial services value

chain based on the results of PRISMS assessment. As indicated in the chart, Nigeria’s private

community bank system offers the most potential to reach the entire range of MSMEs, both

urban or rural. It further shows that selected community banks will be able to move most quickly

to operate as sustainable mechanisms through which rural MSMEs (the backbone of the

economy), can receive access to financial services. Other entities operating in the financial

services chain can also extend their services either upward or downward with increasing cost

effectiveness and decreasing risk. The keys to sustainability for the financial system lie in the

strength of the policy and regulatory framework, the business soundness of the finance



facilitators, the ease and profitability of linkages between finance facilitators, and the cost

effectiveness of outreach between MSME clients and financial facilitators.

B. NEW PARADIGMS FOR AGRICULTURAL DEVELOPMENT AND RURAL FINANCE

In this portion of the strategic framework, we move from defining the characteristics of the

operating system to building a conceptual context for design of PRISMS implementation

elements. This context will help in identifying business models needed to drive formation of

financial linkages that will result in increased access to finance.

1. Installing a Focus on Competitiveness

Each of the following three development models looks at factors of supply and demand from a

different perspective. Each represents a shift in the thinking that guides approaches to

development of commodity subsectors. While each of these models represents an approach that

can be described as demand-driven, each illustrates the fact that there are very different ways to

approach demand, and that the difference in approach leads to different emphasis within

programs and projects.

Rural Economic Development Model

Until the last 30 years, agricultural growth in Nigeria was guided by the imperative to improve

the factors of production that would increase the ability of Nigerian commodities to respond to

market demands. The Rural Economic Development Model, illustrated below, draws attention to

the importance of generating effective demand for agricultural products, which results in

increased production efficiency at lower unit cost. This efficiency results from improvements in

factors such as better technology, better farming practices, and increased human capital. When

these factors lead to production of the quantity and quality of goods sought in the marketplace

A Sustainable Financial Services Value Chain MSME Client Base Finance Facilitators

Producer Organizations / Business Associations

Savings and Credit Coop, Community Banks, MFIs

Community Banks, MFIs, Leasing Companies

Community/Commercial Banks, Leasing Companies

Producers Microentrepreneurs Producer Organizations/ Business Associations

Small Businesses Medium Enterprises

Community Banks

supporting extension to MSMEs

with appropriate

BDS support

Commercial Banks, Leasing Companies

Community Banks linked to

all other elements within the

financial value chain

CBN

Policy, legal, regulatory, supervisory

reform; system oversight

Elimination of

subsidies



(demand led production), product sales lead to increased farm household income – multiplied in

many households.

Effective Market

Demand

Agriculture Production + Quality

Increased Rural

Purchasing Power

Rural Enterprises & Services

IncomeJobs

EnterprisesIncome

Jobs

Rural EconomicDevelopment Model

Ef f iciency

Technology

Practices

Human Capital

Factor Inputs

Increased Farm

Household

Income

This increased income puts more money in the hands of rural consumers, and results in increases

in rural purchasing power (RPP), which itself is another form of effective demand that seeks

goods and services in the marketplace. The most important of these goods are what economists

call non-tradable goods, essentially perishable food and locally produced and consumed goods

and services. The demand for these goods leads to expansion of rural enterprises and services

because, in a competitive environment, rural enterprises make necessary investments and

organizational changes to produce more efficiently. At the household level, the net impact is

increased income, which translates to sustainable livelihoods. At the rural economy level, the net

impact is increases in income, volumes and values of selected commodities and products – the

results being sought under SO12.

The rural economic development model helps us see that PRISMS’ focus must be on finding

ways to increase financial flows to producers by linking them to opportunities for value-added

enterprise development, within market-linked commodity chains. The problem with this model is

not the model itself, but the fact that it lacks a vision of the factors of production as they are

linked to the opportunities within commodity market chains.

Business commodity chain model In recent years, development thinking has shifted to a focus on commodity chains, and on the

supply and demand linkages within these chains. The commodity marketing chain model looks at

the relationship between effective demand, and the corresponding production supply chain put

into place to satisfy that demand. Through this lens, one can look at the same relationships



defined in the rural economic development model, but this time from the perspective of buyer-

supplier linkages.

Commodity Marketing Chain Model

Consumers

Producers

Final DistributorsRetailers

Value-added Processors/Exporters

Importers

Intermediate

Processors/Handlers

Transporters

Storage Providers

Buyers/Traders

Assemblers

Farmer/Producer/Business Organizations

Inputs and Technology Suppliers

Business Model

Supply

Dem

and

This model facilitates our ability to identify all of the linkages that exist between the consumer –

where demand is generated – and the producer – who responds to that demand. Service

enterprises and organizations along the chain transmit demand from consumers to producers, and

support the production and services required to supply the quantity and quality of goods

demanded by the consumer. By forging linkages between businesses within the chain, it is

possible to facilitate expanded financial flows that lead to increased MSME activity along the

chain.

Competitiveness model

The final lens, shown below, is adapted from Michael Porter’s competitiveness framework and

illustrates the same elements shown in the other models. But, for the first time, the model defines

the roles of a wide range of private and public sector players in building Nigeria’s

competitiveness in its target markets – domestic, regional and international. This model

showcases the importance of building private-private and public-private partnerships in support

of competitiveness. When the same elements of the earlier models are viewed through this lens,

the focus of activity shifts to developing market-driven, national business plans to guide

commodity subsector development.



Transforming Commodity Subsectors into National Industries

The competitiveness paradigm supports the formation of national business strategies to rally both

government and private sector support, and reveals the range and types of partnerships needed to

promote economic development on the scale required in Nigeria. Such strategies provide

frameworks that support identification of the ways in which Nigeria can transform – from its

current, predominant focus on supply-sided technical development (understandably driven by the

notable achievements of the country’s four international and 20 national research institutes) – to

a context characterized by assessments of potential for impact in target markets. The answer to

the question of how Nigeria can best put its commodity, processing and crop systems

technologies and improvements to use is provided when

private sector response to market demand requires adoption

and application of such improvements as part of specific,

market-linked business strategies. This context in turn

supplies the momentum needed to spur MSME growth

along commodity chains. The starting point for

transformation is development of competitiveness

frameworks to guide work being done within commodity

chains.

2. How MSMEs work within Commodity Marketing Chains

Whether called a commodity marketing chain or a value chain, a commodity chain is the market-

linked, supply-demand system that is in place to move and transform agricultural commodities

from the farm to the marketplace.

Market Factors

Core group of sophis ticatedlocal buyers

Local dem and –Serving global markets

Factor (input)

Conditions

QuantityCost

Quality

physical, human, and knowledge resources,

infrastructure, andfinancial and social capital

Global Context for Competition National Agribusiness Strategy

Related and Supporting InstitutionsBusiness Associations -- Input Suppliers -- Financial Institutions –

Research Associations – Extension and Training – Government Agencies

A support framework that encourages

appropriate forms of inves tm ent and

competition

Competitiveness Model

What Can Nigeria Do With… 40 improved cassava cultivars 70 improved soybean varieties 126 improved varieties of cowpeas 68 improved yam varieties 36 improved maize varieties 5 improved rice lines



There may be more or fewer layers on the chain depending upon the commodity, but the basic

concept of the commodity value chain remains the same. Each layer in the chain, as illustrated on

the following page, represents the MSMEs who provide the marketplace for the layer below it.

Each layer in the chain has its own requirements both as a supplier and a buyer in the market

chain. To move up the chain, the supplier must be able to provide what his/her buyer, the market,

wants. To work most effectively, it is necessary to know what each buyer at each point in the

market chain is looking for in order to please the markets into which the enterprise’s products

flow. As the length of the chain decreases through consolidations, better application of

technology, increased access to inputs, etc., price and production efficiencies are achieved that

result in a greater ability to compete within the marketplace.

The chart on the next page illustrates the range of linkages in a commodity chain, as well as the

range of financial and non-financial services that are most in demand at each level in the chain.

As one works up the chain from the farmers, who are the foundation for the chain, the

requirements for financing and for BDS support change. In USAID’s experience in other

countries, for example in Malawi and Uganda, sound business linkages made within the chain

facilitated access to both business development and financial services needed to support such

linkages along the chain. The following paragraphs provide insight into the characteristics of

each level within the chain.

Farmers

The farmer who tills at the bottom of the chain on less than two hectares of land remains the

engine of the Nigerian agricultural sector. His ability to scale up is a function of how well he is

able to manage his resources. The lack of organized platforms to support the ability of farmers to

mobilize producer groups, and use them to negotiate and deal in input and output markets, is a

major source of inefficiencies and lack of productivity within agricultural commodity chains.

Farmer/Producer Business Associations

Farmer’s trade groups and business associations can reduce production costs through group input

and output marketing. Where they are strong, they become effective business units that operate

in the marketplace to take the place of middlemen – and bring the middleman’s margins to their

members. Such groups are primary change agents and need to be strengthened to provide the

basis for commodity chain productivity, effectiveness and efficiency.

Intermediate Buyers/Distributors/Input Suppliers/Traders

Depending upon the commodity, there may be one or two layers of these service providers. Each

layer represents another piece of the market price. In an increasingly effective commodity chain,

this is the first level of consolidation as producers become organized and able to force

competition, for example by tendering for the provision of inputs to their members, and/or by

seeking to sell directly up the chain. By making these moves, producer organizations force

marketplace consolidation and competition. At present there is little competition at all in the

downward flow of inputs to producers, except among input suppliers who jockey among

themselves for access to supply and work within small margins. As the chain strengthens, savvy

distributors and suppliers in this part of the chain find ways to merge with other businesses in the

chain, or they innovate with new products and services.



Commodity Chain Economic Clusters

Intermediate Processors/Handlers/Auctions

Smallholder Farmers

Producers

Industrial processors domestic & exporters

Value-added processors &

exporters

Long-term financing Financial innovations Guarantee programs Development incentive programs Corporate sponsorship

Medium-term financing Bank lending programs Equipment leasing Guarantee programs Corporate linkages

Short/medium-term financing Equipment leasing Corporate linkages

Many trade on own account; play role in enterprise growth when involved elsewhere in chain and/or when part of project such as DAIMINA

Input financing Crop financing Outgrower support Credit extension

Venture packaging & design Market expansion support Supply organization & control Guaranteed quality Guaranteed supply

Market expansion strategies Handling Packaging technologies Competitive access to supply and quality

Market & distribution programs and strategies Improved supply access Business growth strategies Improved supply/market linkages

Most do not use BDS; tend to rely on knowledge and experience unless involved elsewhere in chain or part of project such as IFDC’s DAIMINA

Association development Farmer business organization Market access programs Farming as business models Agronomic extension Bulk purchasing programs Marketing operations Transport operations

Financial Services Market-Linked Clients Business Services

Strong economic clusters form around defined market opportunities and are grounded in strong linkages to producers. Strong producer organizations lower production costs by developing efficiencies in supply and delivery of inputs and related production and marketing services to members. Such organizations become sustainable when they are able to offer members a range of financial and non-financial services on a for-fee basis. Using best practices approaches, producer groups would extend financial services to members by working on a contract-for-services basis with financial services suppliers, e.g., community banks. PRISMS works with SO12 partners and other organizations to support the development and emergence of economic clusters, such as those in cassava, rice and grains/cowpeas, and to increase the flow of financial resources to the cluster. PRISMS leverages its resources by promoting and facilitating private sector buy-in and participation. PRISMS supports the ability of financial and non-financial service providers to design and deliver services.

Intermediate

Processors/Handlers

Intermediate Buyers/Distributors/In-put

Suppliers/Traders

Farmer/Producer Business

Associations



Intermediate processing of farm produce in Nigeria is handled, to a large extent, at the cottage

level. This processing includes cleaning, grading, weighing, bagging, etc. Some cottage

processing may involve oil extraction from oil seed, peeling and grating of cassava, cleaning and

winnowing of grains and cowpeas, etc. MSMEs at this level in the chain are looking for

guaranteed supply of product. There is demand for equipment, operating capital, new

technologies, market information, and quality assurance programs. For such operations, leasing

and trade credits and inter-firm linkage opportunities supported with guarantees may be options

for consideration in designing financial and non-financial services.

Value-Added Processors and Exporters

This category includes producers of finished goods or semi-finished industrial commodities. The

loan demand for both operating and capital items becomes higher, and potentially more difficult

to source, as commercial and community banks are not playing the roles expected of them. The

inability of this category of value providers to access funding is largely responsible for the

existence of the missing middle among agricultural SMEs. Yet businesses operating in this layer

of the chain have assets and collateral, and more frequently they have established relationships

with the formal banking system.

International Processors, Exporters, and Importers

Corn/cassava starch, malted sorghum, corn grits, cassava pellets, etc, are industrial products

valued and priced by urban-based international processors such as Cadbury, Nestle, Nigerian

Breweries, Guinness, Lever Brothers, etc., who are responsible for processing this industrial

commodities to finished consumer product.

Demand for financial services in a

commodity chain results from the drive to

be more efficient and generate more

income. Producers’ demand for finance is

basically driven by their need for improved

technology, and inputs – including

fertilizer, seeds, agrochemicals, small tools,

labor, transportation, tillage, (either

machine or animal), and packaging. Other

commodity chain players require access to

financial products for equipment leasing,

crop financing, export financing, etc.

Demand for non-financial services exists at all points along the chain. Businesses operating

along the chain need access to business planning, market development, and expansion strategies.

They need assistance in the areas of management, training, financial systems, etc. And they need

help from BDS providers who understand the dynamics of the business in which they work. This

expertise is not readily available to them. One of the challenges of effective organization within

the commodity chain is to create linkages between various levels of the chain into which many of

the required business development services are embedded; in other words, the extension services

and/or technical assistance required is included in the structure of the business relationship.

The Financial Power of Non-financial Services

Dr. Ahmed Mustapha Falaki works with Sasakawa Global 2000’s Nigeria Project. Working with farmer groups, the project has been successful in increasing yields, especially in maize. Collectively, groups have been able to source fertilizer in quantity directly from importers at substantial savings. Through group purchase, farmer groups have been able to receive discounts of up to 10% below prices offered to dealers. Importers have also been willing to provide transport in areas where the farms are accessible, thus saving still more money for farmers affilitated with the scheme. In Malawi, savings of 50% have been obtained through bulk purchase and distribution of inputs. Source: PRISMS Assessment Team Field Visit, 2004



3. Economic Clusters

As demonstrated above, there are a number of potential intervention opportunities within a given

commodity chain. One of the challenges facing USAID/Nigeria and other donors is to determine

which interventions will make the most impact, particularly in a country as vast as Nigeria, and

in commodity subsectors such as rice, cassava and sorghum which cross much of the country.

Economic clusters, which are a critical component of competitiveness approaches, are an

appropriate vehicle for focusing and organizing activity.

Clusters and How they Work

Clusters are groups of private and public sector individuals who work together to set and achieve

defined goals. Clusters often are formed to operate within specific geographic boundaries, but

they can also form around several factors. For example, a cluster can form around a specific

market segment, with geographic boundaries determined by the needs of the market segment,

and/or by a combination of market and geographic requirements. Clusters focus on identifying

strategies for growing markets – local, regional and international – and on identifying the ways

in which resources within the commodity chain can be focused, grouped and partnered to support

achievement of market targets. In all cases, clusters work most effectively when they are driven

by private sector initiative within the framework of specific plans and characterized by strong

private-public sector partnerships formed to support and ensure plan implementation.

Roles within Clusters

One of the most important aspects of clusters is that they function by involving all relevant actors

in the work of moving the cluster forward. The basic theme for a cluster is “Cooperate to

Compete.” Business leaders who control access to markets operate as private sector champions

within clusters because they are focused on meeting market demands, understand the

requirements of those markets, and have existing relationships with financial institutions.

Government agencies that provide regulatory and extension services, work as part of the cluster

to facilitate access to needed government support and resources. Non-governmental

organizations, that are already providing services to groups within the chain, become key

implementing partners, and the cluster is designed to build on and add value to the services they

provide. Banks that are providing services to the

business leaders involved in the cluster, and other banks

and/or financial entities that are operating in the area, are

brought into the cluster, as are other types of financial

intermediaries where these are relevant.

Benefits of the Cluster Approach Clusters operate as mini economic development units.

They allow for specific focus and definition of specific

actions – all driven within a market context. Clusters can

be used to shorten the time required before results can be

seen. Within the cluster concept, for example, a

PRISMS cassava cluster initiative can encompass and

add value to the objectives of the Cassava Enterprise

Development Project. For example, within a business

Clusters Increase Access to Finance to Produce PRISMS Results

Clusters can be used as effective vehicles for introducing and adapting financial best practices specific to the types of banking relationships that need to be developed to facilitate financial flows through all points in the MSME financial supply chain. PRISMS clusters will support implementation of high-potential intervention initiatives identified by PRISMS in ways that result in increased livelihoods for farmers, expanded opportunities for value-added production and increased financial flows to MSMEs operating throughout the cluster.



framework put into place by its private sector champions that assigns priorities to various issues,

a cassava cluster would address issues such as the need for new cultivars for control of Cassava

Mosaic Disease and/or for increased productivity from a market perspective.

C. DEFINING IMPLEMENTATION FOCUS AND SCOPE

Based on a synthesis of the design elements, PRISMS set four performance objectives to

facilitate identification of the project components that will best guide implementation and

achievement of results for this performance-based USAID activity:

• contribute to MSME development and financial support activities, particularly with

regard to agriculture and microfinance, in ways that result in measurable impact on the

practices and programs of entities throughout the financial system;

• attract private and public sector support for PRISMS-developed and supported

initiatives by using competitiveness as a theme to draw private sector participation,

and support project ability to leverage resources well above the level of those provided

by USAID for core PRISMS activities;

• structure activities in ways that allow for maximum integration of USAID and other

donor activities within target areas, and for development of models that facilitate

replication;

• operate PRISMS as a collaborative and supportive development partner, particularly

with regard to harnessing and directing private sector-led competitiveness approaches.

Determining how best to achieve these objectives in ways that will create impact led to

identification of PRISMS project components.

1. Impact through Competitiveness

To support the project’s ability to meet all of its objectives, PRISMS will use “global market

competitiveness” as a theme throughout all project activities. The majority of Nigeria’s existing

rural development initiatives, even those which claim to be demand-driven, remain largely

supply-sided. Even larger initiatives, such as the Shell-supported Cassava Enterprise

Development Project, are currently being implemented without an adequate competitiveness

framework. Market-driven efforts within commodity chains, such as those supported by RUSEP,

appear insignificant when compared to the size of the challenges faced by Nigeria in

transforming commodity subsectors into national industries. PRISMS will take a global market

perspective on all commodity initiatives, and use competitiveness as a theme to unite both

private and public sector actors.

Competitiveness is part of the foundation for USAID’s worldwide economic growth initiatives,

and in USAID’s experience, the competitiveness message is one that private sector actors with a

stake in Nigeria’s development will understand. There is no project operating in Nigeria with this



specific focus. PRISMS provides an opportunity for USAID to build on the agency’s global

experience with – and commitment to – private sector-led economic growth, and to fostering

improved global competitiveness by developing awareness of – and using competitiveness

approaches to – guide subsector development. PRISMS will use competitiveness as a theme to

encourage private sector participation, to develop private/public partnerships and to leverage

resources. The results of these activities will lead to measurable results and impacts.

2. Impact through Models

To achieve this objective, PRISMS will develop economic clusters within which the commodity

and financial services chains presented in Section A are linked together to support and create

opportunities for MSME growth, for financial institution involvement, and for other donor

participation. These new models will support development of an integrated financial system that

provides maximum support to MSME growth, particularly to microfinance, promotes farmer

involvement in the financial system, and develops sustainable mechanisms for extending finance.

For example, a cassava initiative piloted in one geographic area to support the ability of an

association to set up farmer enterprises around the use of leased equipment can easily be

replicated in other areas once the model is known. PRISMS can increase its impact by working

through a project component that focuses on developing economic clusters, which develop new

models for MSME development and financial services within commodity chains. PRISMS will

design models, document experience and disseminate results. Results of these PRISMS

initiatives can be measured in terms of jobs, incomes, increases in value-added, etc.

3. Impact through Collaboration

PRISMS will operate as a catalyst, intermediary and facilitator within the context formed by

competitiveness, models for business linkages and improved financial flows, and approaches to

policy development and implementation. To meet its performance objectives, PRISMS needs to

implement a component aimed at ensuring maximum integration and cooperation with other

projects and partners in the development and packaging of cluster initiatives, and in provision of

support for adoption and adaptation of microfinance best practices. PRISMS will know that it

strategy is working when it finds that clusters are being initiated by other organizations; and

PRISMS will provide technical support to the implementation of these initiatives, as long as they

are targeted to achievement of results that fit within USAID’s mandate for PRISMS. To ensure

maximum integration between USAID’s projects – among all Strategic Objectives – PRISMS

will place priority on developing and carrying out pilot initiatives within geographic areas

already targeted by USAID/Nigeria.

4. Guiding Principles

PRISMS will be guided by five principles that guide the ways in which PRISMS organizes its

work, chooses its partners, and allocates its resources in support of implementation.

Adding value

PRISMS will operate as an honest broker, a coordinator, a facilitator, and a mentor in such areas

as, e.g., the design and development of sustainable approaches to microfinance and the



development and packaging of economic cluster activities. The PRISMS technical team will

make its perspective and skills available to support the work of other projects and initiatives, and

will place priority on incorporating the work of others into project activities in ways that add

value to them – and to PRISMS.

Adapting best practices

USAID’s global microfinance experience brings access to models from, for example, the

Philippines and Uganda. Best practices are transferable to the Nigeria context to support

development of a sustainable microfinance industry, and implementation of business linkage

models within economic clusters. Within the context of its project components, PRISMS will

facilitate the transfer of best practices models, adaptation of these models using competitive

approaches to transfer and training, and development of the capacity of BDS providers to

innovate and deliver best practices services.

Focusing on sustainability

Many MFIs, non-financial intermediaries such as associations and BDS suppliers, lack the

expertise needed to develop revenue-generation plans and sustainability strategies. They need

exposure to new strategies and approaches to operation and assistance with design and

implementation of such strategies. PRISMS will incorporate a sustainability focus into all work

carried out within the context of economic cluster activities.

Harnessing business initiative PRISMS will maximize the level of private sector involvement in all of its initiatives by using

private sector initiative to drive formation of strategies to achieve market success. PRISMS will

develop market-based relationships, for example between producers and processors, that can be

sustained within the context of the supplier-buyer relationship without the necessity for external

subsidy.

Mainstreaming cross-cutting themes PRISMS will design and implement its interventions to maximize opportunities for integration of

cross-cutting themes such as gender, HIV/AIDS, environment, health and education into the

fabric of all its activities. To do this effectively, PRISMS will seek opportunities to integrate

activities from other USAID Strategic Objectives into PRISMS programs and into the work of

organizations with which PRISMS interacts.

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