EIB Working Papers 2019/10 - Structural and cyclical determinants of access to finance E-Book

• Herausgeber: European Investment Bank
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 57

Veröffentlichungsjahr: 2020

Beschreibung

Egyptian firms face significant access to finance constraints. Using panel data, this paper examines the reasons why many Egyptian firms do not use formal banking services. Using data on the location of firms and bank branches, it also investigates whether access to finance constraints are linked to the crowding-out effect of bank investments in government debt.

Leseprobe

Structural and cyclical determinants of access to finance:

Evidence from Egypt

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Disclaimer

The views expressed in this publication are those of the authors and do not necessarily reflect the position of the European Investment Bank.

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Contents

1 Introduction

2 Candidate factors affecting the participation of firms in the financial system

2.1 Informality and intermediation capacity of the banking system

2.2 Entrepreneurial human capital

2.3 Institutions

3 Data

4 Empirical strategy

5 Results

5.1 Financial inclusion

5.2 Credit constraints

5.3 Beyond Egypt

6 Conclusion

References

Figures and Tables

Structural and cyclical determinants of access to finance: Evidence from Egypt[*]

Frank Betz

European Investment Bank

Farshad R. Ravasan

University of Oxford

Christoph T. Weiss

European Investment Bank

Abstract

Using panel data on Egyptian firms to explore cyclical and structural determinants of access to finance, we find that firms with more educated and more experienced managers are more likely to open a checking account, often a prerequisite for obtaining credit. Firms that started operating in the informal sector before registering are less likely to engage with the banking system. Exploiting data on the location of firms and bank branches, we also show that firms located in areas with a greater presence of banks that invest more in government debt are more likely to be credit constrained due to crowding out of the private sector.

JEL classification: G21, O15, O17

Some keywords: Financial constraints, crowding out, managerial skills

1 Introduction

It is well established that financial development is connected to economic growth (Levine, 2005). While most studies rely on macroeconomic data, a growing literature use firm-level evidence to explore different mechanisms through which finance can influence private sector development in emerging economies (Beck et al., 2007). This paper discusses structural and cyclical aspects of access to finance using unique data on the location of firms and bank branches in the Middle East and North Africa (MENA).

We first examine the structural participation decision that looks at whether a firm has a checking account. We then study the provision of credit over the business cycle. In particular, we look at whether a firm is credit constrained. Credit-constrained firms fall in one of two categories: (i) firms that applied for a loan and were rejected; and (ii) firms discouraged from applying either because of unfavourable terms and conditions or because they did not think the loan application would be approved. As only firms that exhibit demand for credit can be constrained, this approach enables us to separately study demand and supply of credit - by instrumenting credit demand with a liquidity shock. The mechanisms that we analyse include entrepreneurial human capital, institutional quality and the intermediation capacity of the financial system.

Recent studies on access to finance in middle-income economies typically focus on credit constraints. For example, Popov and Udell (2012) explore how, in the context of the financial crisis, distress events in European banks tightened credit constraints in Eastern Europe. Gorodnichenko and Schnitzer (2013) examine how credit constraints affect Eastern European firms’ ability to innovate. While our paper also examines credit constraints, we argue it is important to take one step back and also look at the prevalence of checking accounts, especially in emerging economies.

When deciding whether to open a checking account, firms trade off costs and benefits. Access to finance is valuable for firms with substantial growth opportunities, while the costs can consist of taxes, licensing requirements and social insurance contributions (Straub, 2005). Incurring these costs is worth less if the intermediation capacity of the banking system is weak and thus the likelihood of being credit-rationed is high. Beck et al. (2014) provide evidence on the empirical salience of the tax evasion channel. They find that there is less tax evasion in countries with better intermediation capacity.

A checking account is important for access to finance because it allows a bank to monitor inflows and outflows and thereby reduces the information asymmetries that plague lending to small firms.[1] For instance, the SME lending methodology proposed by Munro (2013) requires that a potential borrower opens a checking account and runs all transaction through this account for at least 6 months to establish reliable turnover and cash-flow figures before the bank would consider a loan application. But routing transactions through the checking account also comes at a cost for the firm because it can become more difficult to hide these revenues from tax authorities.

We explore how firms interact with the banking sector in MENA using data on Egypt as a laboratory. We focus on Egypt as this is the country where the issues that we are interested in are most salient. The size of the informal economy is particularly large and estimated to account for about 35% of GDP (Medina and Schneider, 2018). Informal firms are unregistered and typically excluded from the formal financial system. Moreover, as Figure 1 shows, even among registered firms, less than 70% had a checking account in 2013 and 2016 (60% and 69%, respectively). This figure is much lower in Egypt than in other MENA countries. This is one of the reasons why Egyptians often refer to their economy as a “cash economy”. Last but not least, with a population of almost 100 million that is growing by close to 2 million individuals per year, Egypt is the pivotal country of the Southern Mediterranean.

Firm size is strongly associated with having a checking account. Figure 2 plots the median number of employees conditional on age for firms in the MENA region.[2] While old firms with a checking account tend to be larger than young firms with a checking account, unbanked firms remain small, regardless of age. The figure is also in line with the evidence of Eslava et al. (2019) and Hsieh and Klenow (2014)