This paper reviews the impacts of multiple agricultural partial credit guarantee schemes (PCGSs), through which governments agree to absorb a portion of lenders’ losses on particular loans or loan portfolios. Governments often use PCGSs to de-risk financial institutions’ lending to small and medium-sized enterprises (SMEs), especially as a countercyclical tool in times of financial crisis when private lenders generally cut lending to SMEs. Previous studies have offered mixed evidence on the efficacy of PCGSs, as they can increase moral hazard for both borrowers and financial providers.
In their work, the authors consider financial additionality, economic additionality, financial sustainability and outreach. Financial additionality reflects incremental credit flows to SMEs as a result of the interventions. Economic additionality refers to the effects that PCGSs have on the broader economy, such as employment and sales. Financial sustainability is the ability of lenders to earn more revenue than each program costs. The last factor, outreach, measures the extent to which the program meets SMEs’ demand for financing.
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 to benefit small-scale farmers, ranchers and fishers. A study published in 2017 found the scheme to have a positive relationship with national GDP. Another study, published in 2015, found that although 71 percent of farmers interviewed were “ignorant of the ACGSF’s activities,” those who knew of ACGSF stated it had a positive economic impact on their community.
The authors also reviewed the efficacy of several guarantee schemes of the Development Credit Authority (DCA), which was established in 1999 by the US Agency for International Development (USAID) to provide partial credit guarantees to private financial institutions in low- and middle-income countries. In 2001, USAID Rwanda began 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 the principal of loans to “export-oriented agriculture enterprises.” The bank issued USD 1.7 million in loans to such enterprises, but an external evaluator found that the program “failed to influence the overall lending behavior of the formal banking sector to agriculture.” On the contrary, local banks remained resistant to lending to the agricultural sector, particularly without a third-party guarantee.
This is a summary of a paper published by the UN’s Food and Agriculture Organization (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
Additional Resources
FAO homepage
https://www.fao.org/
ACGSF webpage
https://www.cbn.gov.ng/devfin/acgsf.asp
Bank of Kigali homepage
https://bk.rw/
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