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Cultural fractionalization and informal finance: evidence from Indian firms

Author

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  • Khondker Aktaruzzaman

    (Xiamen University Malaysia)

  • Omar Farooq

    (ADA University)

Abstract

This paper is an attempt to document the impact of fractionalization on the demand of informal finance in India. Using the data provided by the World Bank’s Enterprise Survey, we show that firms headquartered in states/provinces with higher degree of fractionalization are more likely to use informal finance (such as the financing from trade creditors, moneylenders, and friends) than firms headquartered in states/provinces with lower degree of fractionalization. Our results are robust across various proxies of informal finance and various sub-samples. We also report that the effect of fractionalization on the use of informal finance is weaker where state-level or firm-level governance environment is strong. We also show that (when it comes to the use of formal finance) fractionalization is associated with higher use of retained earnings and lower use of funds provided by the banks.

Suggested Citation

  • Khondker Aktaruzzaman & Omar Farooq, 2020. "Cultural fractionalization and informal finance: evidence from Indian firms," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 10(4), pages 661-679, December.
    • Handle: RePEc:spr:eurase:v:10:y:2020:i:4:d:10.1007_s40822-020-00149-y
    DOI: 10.1007/s40822-020-00149-y
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    Cited by:

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    2. Adem Baltaci & Raif Cergibozan & Ali Ari, 2022. "Cultural values and the global financial crisis: a missing link?," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 12(3), pages 507-529, September.
    3. Salinas, Aldo & Ortiz, Cristian & Changoluisa, Javier & Muffatto, Moreno, 2023. "Testing three views about the determinants of informal economy: New evidence at global level and by country groups using the CS-ARDL approach," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 438-455.

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    More about this item

    Keywords

    Informal finance; Religious fractionalization; SMEs; Enterprise surveys; Emerging markets;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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