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When Do Enterprises Prefer Informal Credit? / Safavian, Mehnaz
World Bank Open Knowledge Repository (formerly "World Bank E-Library Publications") Available online
View online- Format:
- Book
- Government document
- Author/Creator:
- Safavian, Mehnaz
- Series:
- Policy research working papers.
- World Bank e-Library.
- Language:
- English
- Subjects (All):
- Access to Finance.
- Banks and Banking Reform.
- Bribes.
- Capital Requirements.
- Commercial Banks.
- Creditors.
- External Finance.
- Finance and Financial Sector Development.
- Formal Finance.
- Formal Financial Sector.
- Informal Credit.
- Informal Finance.
- Working Capital.
- Local Subjects:
- Access to Finance.
- Banks and Banking Reform.
- Bribes.
- Capital Requirements.
- Commercial Banks.
- Creditors.
- External Finance.
- Finance and Financial Sector Development.
- Formal Finance.
- Formal Financial Sector.
- Informal Credit.
- Informal Finance.
- Working Capital.
- Physical Description:
- 1 online resource (34 pages)
- Place of Publication:
- Washington, D.C., The World Bank, 2008
- System Details:
- data file
- Summary:
- 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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