COLLATERAL-FREE FINANCING AND FINANCIAL INCLUSION FOR SMES IN LAGOS STATE: AN INVESTIGATION

Abstract

This study investigated the effect of collateral free financing on small and medium scale enterprises, with a particular focus on the impact of the Agricultural Credit Guarantee Scheme Fund (ACGSF) and Small and Medium Enterprise Finance (SMEF). Employing regression analysis and Granger causality tests on data from 1981 to 2023, the study finds that the ACGSF positively and significantly influences financial inclusion (coefficient = 0.40057, p = 0.00111), suggesting that government-backed credit schemes in agriculture enhance access to financial services in underserved areas. However, SMEF reveals a negative association with financial inclusion (coefficient = -0.050913, p = 0.0126), indicating that current MSME financing frameworks may be insufficiently inclusive, potentially due to high borrowing costs and sector-specific structural challenges. High-interest rates further impede financial inclusion, while favorable exchange rates are shown to have a positive effect, pointing to the role of currency stability in supporting financial accessibility.

Granger causality tests indicate a unidirectional causality from both ACGSF and SMEF to financial inclusion, underscoring the long-term effects of these financing mechanisms on access to financial services. The study concludes that while agricultural credit schemes promote financial inclusion, revisions to SME finance policies are essential to optimize inclusivity goals. Key recommendations include enhancing agricultural credit schemes, redesigning SME financing models, lowering borrowing costs, and ensuring exchange rate stability to promote an inclusive financial landscape. This research contributes to the existing knowledge on financial inclusion by highlighting the differential impact of credit schemes on financial accessibility in Nigeria, providing empirical insights for policymakers to develop targeted interventions in similar emerging economies.