The Relevance of Bank Lending Behaviour for the Efficiency of Public Credit Guarantee: Evidence from Nigeria

Abstract

The amount of credit additionality achieved by banks using public credit guarantees (PCGs) constitutes an important problem in policy concerns about the use of PCGs to fund credit rationed sectors. Policymakers and academic research evaluate PCGs as efficient methods for credit allocation to such sectors. The current evidence shows that bank lending behaviour, structured by the requirements of prudential risk guidelines determines the efficiency of PCGs. Studies find that banks using PCGs during the Covid-19 crisis adopted credit substitution, a practice of replacing unguaranteed credits with guaranteed credits which determines a lower credit additionality. This study used aggregate secondary data on the Agricultural Credit Guarantee Scheme Fund (ACGSF) and bank financial indicators in Nigeria and Non-parametric tests and the ARDL econometric models to analyse whether banks’ use of PCGs implemented as development policy tools under normal economic conditions in developing economies such as Nigeria also involve credit substitution. The study finds that the guarantee coverage has a direct positive effect on credit additionality in both the short run and long run periods but bank size and the share of bank agricultural credits in bank total credits each has negative effects on growth of additional credit.  The study concludes that the PCGs may be seen as effective development policy tools for sustained credit additionality to credit rationed groups, and that bank lending behaviour has important consequences for the impact of the PCGs on credit rationed groups. The study recommends that policymakers require that guarantee fund be additional to existing market-based credits and that policymakers should encourage the participation of smaller sized banks.

Keywords: Public credit guarantees; banks; Credit additionality