Informal Sources of Credit and the Soft Information Market: Evidence from Sofia

The development of the banking sector as well as the recent macro-economic stability in Bulgaria fostered credit. There are signs of a credit boom and all the conditions for the development of credit to small and medium enterprises are met. Such a boom is the root of the future development of Bulgaria: with more than 99% of small and medium enterprises, representing 34.2% of the value added, and 61.1% of the turnover in private enterprises, they are the essential entrepreneurial force in the country. The access of these firms to financial resources is the condition for the development of businesses through individual efforts on the market. The profitability of loans to big firms, the uncertainty of loans to small enterprises, and the inefficiencies of the legal systems are usually pinned down as the sources of the difficulties of entrepreneurs to find financial resources. Such a situation may hamper the development of the private sector in Bulgaria but also, as this article will show, maintain a part of the private sector in the informal economy. This study aims at showing that the sources of credit for SMEs in Bulgaria are largely dominated by informal forms of credit – i.e. in the family, among friends, etc. – and that the intervention of bank loans comes later in the life cycle of businesses. Networks are thus the root of credit to SMEs. If loans are not available through the banking system, individuals tend to look for loans through their network of relatives and friends. Using a hypothesis formulated by Black and Strahan (2002) and adapting it to the case of Bulgaria we show that it is the type of information required by the lender that influences the sources of credit used. Using a sample of 149 firms in Sofia representative of the national sector composition of Bulgaria, we studied the sources of credit of entrepreneurs and their opinion of the accessibility and efficiency of these various sources.