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Library When Do Enterprises Prefer Informal Credit?

When Do Enterprises Prefer Informal Credit?

When Do Enterprises Prefer Informal Credit?

Resource information

Date of publication
June 2012
Resource Language
ISBN / Resource ID
oai:openknowledge.worldbank.org:10986/7597

This paper tests the hypothesis that
enterprises may forgo formal finance in lieu of informal
credit by choice. They do so to avoid the additional
regulatory scrutiny and harassment that engaging with the
formal financial sector invites. We test this hypothesis
using enterprise-level data on 3,564 enterprises in 29
countries. In this sample, enterprises finance
approximately 57 percent of their working capital
requirements with external finance. This external finance
comes from formal sources, such as commercial banks (53
percent) and informal sources (42 percent), such as trade
creditors, or family and friends. In our sample, 14 percent
of enterprises rely exclusively on informal finance. We
find that the likelihood of enterprises preferring to only
use informal finance is inversely related to the quality of
the regulatory environment, particularly the quality of tax
administration and overall governance. For example, we find
that when an enterprise has been asked for bribes by tax
inspectors, it is 17 percent more likely to prefer informal finance.

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Authors and Publishers

Author(s), editor(s), contributor(s)

Safavian, Mehnaz
Wimpey, Joshua

Publisher(s)
Data Provider