Credit Constraints in Manufacturing Enterprises in Africa
We investigate the question whether firms in the manufacturing sector in Africa are credit constrained. The fact that few firms obtain credit is not sufficient to prove constraints, since certain firms may not have a demand for credit while others may be refused credit as part of profit maximising behaviour by banks. To investigate this question, we use direct evidence on whether firms had a demand of credit and whether their demand was satisfied in the formal credit market, based on panel data on firms in the manufacturing sector from six African countries. More than half the firms in the sample had no demand for credit. Of those firms with a demand for credit, only a quarter obtained a formal sector loan. In line with expectations, our analysis suggests that banks allocate credit on the basis of expected profits. However, controlling for credit demand, outstanding debt is positively related with obtaining further lending while micro or small firms are less likely to get a loan than large firms. The latter effect is strong and present in the regression, despite including several variables typically referred to as explaining why small or ‘informal’ firms do not get credit. The role of outstanding debt is likely to be a reflection of inefficiency in credit markets, while the fact that size matters is consistent with a bias as well, although we cannot totally exclude that they reflect transactions costs on the part of banks. Finally, we could not detect any differences between countries in the effects of these factors in the credit allocation rule, although financial deepening is found to explain most of the country-specific fixed effects, shifting the probability of obtaining credit across the firm distribution.
|Date of creation:||01 Sep 2000|
|Date of revision:|
|Contact details of provider:|| Postal: Manor Rd. Building, Oxford, OX1 3UQ|
Web page: http://www.economics.ox.ac.uk/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Soyibo, Adedoyin, 1997. "Financial Liberalisation and Bank Restructuring in Sub-Saharan Africa: Some Lessons for Sequencing and Policy Design," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 6(1), pages 100-150, March.
- Fafchamps, Marcel, 2000. "Ethnicity and credit in African manufacturing," Journal of Development Economics, Elsevier, vol. 61(1), pages 205-235, February.
- Raturi, Mayank & Swamy, Anand V, 1999. "Explaining Ethnic Differentials in Credit Market Outcomes in Zimbabwe," Economic Development and Cultural Change, University of Chicago Press, vol. 47(3), pages 585-604, April.
- R. Glenn Hubbard, 1998.
"Capital-Market Imperfections and Investment,"
Journal of Economic Literature,
American Economic Association, vol. 36(1), pages 193-225, March.
- Xiaoqiang Hu & Fabio Schiantarelli, 1998. "Investment And Capital Market Imperfections: A Switching Regression Approach Using U.S. Firm Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 466-479, August.
- Ijaz Nabi, 1989. "Investment in Segmented Capital Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 104(3), pages 453-462.
- G. S. Maddala, 1987. "Limited Dependent Variable Models Using Panel Data," Journal of Human Resources, University of Wisconsin Press, vol. 22(3), pages 307-338.
- Tybout, James R, 1983. "Credit Rationing and Investment Behavior in a Developing Country," The Review of Economics and Statistics, MIT Press, vol. 65(4), pages 598-607, November.
When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:wps/2000-24. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Monica Birds)
If references are entirely missing, you can add them using this form.