Why many crowdfunding platforms are failing in Nigeria

The Nigerian crowdfunding space appears to be changing direction, presenting a vague future for the business, due to failing operations. This has fueled a rising feeling of pessimism over the crowdfunding industry in the country.

From Farm Power to Payfarmer, Goldvest, Emerald farms, Vestpay, H O Corn, FarmKonnect, Farm Sponsor and a list of endless ventures, these platforms known for funding a project or venture by raising money from a large number of people who contribute relatively small amounts, typically via the internet, have either defaulted or are delaying payments of investment funds, alongside Return on Investment (ROI) to investors.

Nairametrics observed that even the big players—the likes of Agropartnerships (with international partners), Crowdyvest (with a track record of good performance over the years) and Farm360 (with over 7 years of operation), amongst others—have added to the list of platforms delaying payments to investors.

In view of this, stakeholders are worried and raising questions about why crowdfunding seems to be failing in Nigeria, what the future holds for crowdfunding in the country, and whether crowdfunding really works in Nigeria?

Low yield environment amid inflation is forcing investors to seek high returns

In 2020, the Central Bank of Nigeria (CBN) instructed deposit money banks in Nigeria to pay 1.25% in interest on savings deposit accounts per annum, against the previous rate of 3.9%, effective from 1st September. This means that account holders get an addition of N12,500 on every one million kept in the bank for a period of one year compared to the formerly expected yield of N39,000.

Considering the meagre percentage of return on savings and also on fixed deposit accounts, alongside government securities mostly offering a single-digit return in the face of high inflation swinging on double digits and causing the price of food commodities to skyrocket, a lot of Nigerians saw crowdfunding platforms, promising as high as 20-50% ROI within a year, as a better investment option to explore, especially when many investors needed a shock absorber to live through economic hardships worsened by the pandemic.

Unfortunately, the moment didn’t last long as many of the platforms started defaulting and investors who were yet to cash out became victims. They soon got on social media to call out the various platforms for delaying payments. Most complained that the delays had greatly inconvenienced people who had banked on the returns to meet financial obligations ranging from rent payments, to school fees payments, and other crucial expenses.

What the platforms are saying

While delay/default period for many of the crowdfunding platforms may be an unfortunate coincidence that has fueled the assumption that there must be a unified problem, Nairametrics found that the causes of difficulty in meeting financial commitments differ from platform to platform.

In 2020, when Thrive Agric was unable to meet up with payments to investors, the platform ascribed the problem to the COVID-19 pandemic, and its consequent restrictions on physical access to farms and farming markets. Eventually, this was settled after the platform was able to surmount the challenges with time.

But in the case of recent defaults, reasons for delay appear to be as a result of issues ranging from pandemic effects, to unyielding investment, amongst other challenges.

Speaking with Nairametrics in a media chat, Temitope Omotolani, co-founder & CEO of Crowdyvest, explained that the delay in payment of returns to investors in December was as a result of delays in projects that were funded by the platform. He added that the partners of the platform who were supposed to stand in were also experiencing delays in payment for their investment.

Speaking on the way forward, she said, “We already engaged with our members. We sent a mail to those who are affected and we have asked for a 30-day window to come back to them with a clear cut direction. We are hoping that within the 30 days, we would have a proper direction.”

Also, Abiola Ajidagba, Finance Officer, Farm360 said, “What happened is we had a little bit of financial crisis due to the SEC ban on crowdfunding last year when we had already processed some funds into development. So we are actually working towards a repayment plan by the end of the month; we are looking to share a payment plan by the end of the month on how to share their returns. We are working towards early liquidation of the investment and ROI.”

Recall that last year, the SEC set a deadline of June 30, 2021, for the implementation of its rules mandating that all existing portals/platforms that facilitated investment-based crowdfunding to comply with the requirements of the rules and register with the SEC or cease their operations by the 30th of June, 2021.

Ajidagba assured that, “We have been trying to get facilities to pay back investors, but the one we got recently was inputted into our operations so we are looking to start paying back investors out of our operation profit.”

In his opinion, the challenges currently being witnessed will soon be a thing of the past and everything will become normal again as this, according to him is the first time such is occurring since the business has been run for over seven years.

Osazuwa Osayi, CEO, Agropartnerships, has continued to tell investors that funds are safe despite the delay and that by next month, another virtual meeting with investors will be held to discuss solutions.

Also speaking on reasons for the delay, Harrison Andrew, MD/CEO H O Corn, in a mail wrote, “After the closure of our investment, it was time to immediately get to work so that we can fulfill our promises timely. We mobilized our contractor Mr. Adeyemi Oluwatobi Samson (trading with the name, Tracs N Crawlers) the sum of Two Hundred and Thirteen Million Fifty Thousand Naira (N213,050,000.00) to cultivate 5,000 acres (2,000 hectares). To our bewilderment, the contractor only planted 430 acres (172 hectares). This breach of contract adversely disrupted our planting calendar, thereby causing us huge damages.”

However he said that the matter was being addressed in court at the moment as efforts to get the contractor to either complete the project or refund the money all proved abortive and the contractor had instituted a case against the platform at the National Industrial Court, Ibadan Division in .) in Suit. No: NICN/IB/56/2020.

Andrew assured investors saying, “We are committed to our goal of ensuring food security in Nigeria with a focus on grains. We are also committed to fulfilling our promises and ensuring that every investor gets paid. Many investors will get paid this year (2022) and the remaining batch will get paid next year. By the end of 2023, every investor would have been paid their capital and accrued dividends.”

In all of this, Nairametrics has reached out to SEC, but is yet to get a response from the regulator.

What experts are saying

Commenting on the recent happenings in the crowdfunding space, experts have given their views on the trend. Some posit that having unrealistic funding goals is a major reason for the failure as crowdfunding projects are usually underfinanced due to faulty predictions on capital requirements, while a larger chunk is channelled to ROI.

According to Ahmed Hassan, MD, Pristella Business Solutions Limited, there are so many factors contributing to the failure of crowdfunding especially the ones relating to agribusiness in Nigeria, and one of them is the alarming rate of interest in a short while. He said investors should know that 50% ROI was something that wouldn’t last for long because it is not feasible.

He added, “Also, the leaders that understand agriculture do not understand business. And in agri business, if you don’t know both, you have to synergize by looking for a way to get partners or managers to compliment, but in most cases we don’t have such.

“Agric business is a long term business; if you are starting this year, you shouldn’t expect to break even next year. You need a plan before you can start out because it will take you nothing less than three years to break even, as the initial money invested will be used to build the business.

“But what we see today is platforms using the money investors pay to build up infrastructure. What they don’t know is, when they are actually constructing, that money does not have any economic benefit to the business. That means, infrastructure is not something you can get profit from otherwise you lease out. It is only when you buy farm input that you can get profit from it with rime.

“Another mistake that people make is borrowing money to invest. Investment is meant to be done with spare money because it is a risk you are taking.”

Bottom line

How long it will take investors to recover their funds is another pressing issue that investors, whose payments have been delayed, want to know. While some of these platforms have continued to assure investors that payment will be made, they have however not totally convinced investors of the feasibility of the payment plans. In the face of rising bills, expired rents and other accumulating expenses, should investors bank on these platforms?

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