Resource information
Many firms in the developing world --
including a majority of micro, small, and medium enterprises
-- operate in the informal economy. The informal firms face
a variety of constraints, making it harder for them to do
business and grow. Lack of access to finance is often cited
as the biggest operational constraint these firms face. This
paper documents the use of finance and financing patterns of
informal firms, highlights differences between use of
finance by formal and informal firms, and identifies the
most significant characteristics of informal firms that are
associated with higher use of financial services. The
analysis shows that use of loans and bank accounts for
business by informal firms is very low and a vast majority
finances their day-to-day operations and investments through
sources other than financial institutions (internal funds,
moneylenders, family, and friends). A majority of informal
firm owners would like their firms to become formal but do
not do so as it would require them to pay taxes. Registered
firms are 54 percent more likely to have a bank account and
32 percent more likely to have loans. Results also show that
firm size, the level of education of the owner, and whether
the owner has a job in the formal sector are significantly
associated with financial inclusion of informal firms.
