Credit Guarantee Schemes and their Impacts on Small Business Growth in Nigeria

Abstract

This study investigates the impact of credit guarantee schemes (CGS) on small business growth (SBG) in Nigeria over the period 1993–2024. Adopting an ex-post facto research design and utilizing secondary data, the study employed descriptive statistics, stationarity testing using the Augmented Dickey-Fuller (ADF) test, cointegration analysis under the Autoregressive Distributed Lag (ARDL) framework, and both short and long run estimations with relevant diagnostic tests. The findings reveal evidence of a long run equilibrium relationship among the variables. In the short run, commercial bank credit (CBCS), Microfinance Credit (MFC), and aid and grants to SMEs (AGSM) significantly promoted small business growth, whereas SME credit schemes (SMCS) and the Prime Lending Rate (PLR) exerted negative effects. In the long run, AGSM and SMCS demonstrated positive influences on small business growth, while MFC and PLR displayed significant negative effects. CBCS, although positive in the short run, showed no significant long-term contribution due to high interest rates and stringent lending conditions. The error correction mechanism confirmed rapid adjustment to equilibrium following shocks, with about 91% correction each period. The study concludes that effective Small and Medium Enterprise (SME) financing particularly through microfinance credit and reduced lending rates plays a critical role in promoting sustainable small business growth. Conversely, mismanagement of grants, policy inconsistency, and high borrowing costs undermine long term development outcomes. It recommends targeted policy interventions including greater regulatory oversight, zero interest or subsidized loans via microfinance institutions, prioritization of SME lending by commercial banks, and significant reduction of lending rates to single digit levels. These measures would enhance SME productivity, employment generation and inclusive economic development in Nigeria.