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Access to Formal Financial Markets and Microbusiness Formalization in Colombia

Author

Listed:
  • Acevedo, Manuela

    (EAFIT University, Medellin, Colombia)

  • Angel, Andrés

    (EAFIT University, Medellin, Colombia)

  • Acosta, Camilo

    (EAFIT University, Medellin, Colombia)

Abstract

We study the relationship between microbusinesses’ access to formal credit and their transit toward formalization in Colombia. We use the country’s Microbusiness Survey—a database including both formal and informal microbusinesses—together with two definitions of formality: a binary and a multidimensional definition that exploits the array of rules faced by businesses. We document that those microbusiness es that request formal credit have a 12.5% higher probability of not being completely informal. Using the ownership of collateralizable assets as instruments, we confirm that the relationship between both variables is more than just a simple correlation: formal credit can help a microbusiness escape total informality. This positive effect of formal credit is larger for the first stages in the firms’ path toward formalization. On the contrary, informal credit can end up reinforcing firm informality.

Suggested Citation

  • Acevedo, Manuela & Angel, Andrés & Acosta, Camilo, 2023. "Access to Formal Financial Markets and Microbusiness Formalization in Colombia," Coyuntura Económica, Fedesarrollo, vol. 53, pages 51-79, December.
    • Handle: RePEc:col:000438:021120
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    More about this item

    Keywords

    Informality; Gradual Formalization; Microbusinesses Savings; Credit;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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