This paper reviews the impacts of several agricultural partial credit guarantee programs (PCGS), whereby governments agree to absorb a portion of lenders’ losses on particular loans or loan portfolios. Governments often use PCGS to reduce the risk of lending from financial institutions to small and medium-sized enterprises (SMEs), especially as a counter-cyclical tool in times of economic crisis. financial crisis when private lenders generally reduced lending to SMEs. Previous studies have offered mixed evidence on the effectiveness of PCGS, as they can increase moral hazard for both borrowers and financial service providers.
In their work, the authors consider financial additionality, economic additionality, financial sustainability and reach. Financial additionality reflects additional credit flows to SMEs as a result of the interventions. Economic additionality refers to the effects that PCGSs have on the wider economy, such as employment and sales. Financial sustainability is the ability of lenders to earn more income than the costs of each program. The final factor, scope, is the extent to which the program responds to the demand for financing from SMEs.
The paper includes an analysis of previous studies on the Agricultural Credit Guarantee Scheme Facility (ACGSF), which was established in 1977 by the Nigerian government for the benefit of smallholder farmers, ranchers and fishermen. A study published in 2017 found that the regime had a positive relationship with national GDP. Another study, published in 2015, found that although 71 percent of farmers surveyed were “ignorant of ACGSF’s activities,” those who knew about ACGSF said it had a positive economic impact on their community.
The authors also examined the effectiveness of several guarantee programs of the Development Credit Authority (DCA), which was established in 1999 by the United States Agency for International Development (USAID) to provide partial credit guarantees to financial institutions. in low- and middle-income countries. countries. In 2001, USAID Rwanda launched several projects to assist the Rwandan government in its national coffee strategy. For example, DCA provided a guarantee to the Bank of Kigali covering 40 percent of losses on principal of loans to “export-oriented agricultural enterprises”. The bank granted $ 1.7 million in loans to these companies, but an external evaluator found that the program “has failed to influence the overall lending behavior of the formal banking sector to agriculture.” On the contrary, local banks have remained reluctant to lend to the agricultural sector, especially without third party guarantees.
This is a summary of an article published by the Food and Agriculture Organization of the United Nations (FAO), December 2021, 72 pages, available at https://www.findevgateway.org/paper/2021/12/impact-evaluation-credit-guarantee-schemes-agriculture
By Zachary DeLuca, Research Associate
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