Description: When Do Enterprises Prefer Informal Credit?

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When Do Enterprises Prefer Informal Credit?

This paper tests the hypothesis that enterprises may forgo formal finance in lieu of informal credit by choice. They do so to avoid the additional regulatory scrutiny and harassment that engaging with the formal financial sector invites. We test...

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Bibliographic Details
Main Authors:	Safavian, Mehnaz, Wimpey, Joshua
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	ACCESS TO FINANCE ACCOUNTING ACCURATE INFORMATION ASSET VALUES BANK CREDIT BANK LOANS BANK OFFICIALS BANK POLICY BANK SUPERVISION BORROWER BORROWING BRIBE BRIBES BUSINESS ENVIRONMENT BUSINESS OPERATIONS BUSINESS PLANS BUSINESS REGISTRATION BUYER CAPITAL REQUIREMENTS CASH FLOW CHECKS COLLATERAL COLLATERAL REQUIREMENTS COMMERCIAL BANKS CORPORATE FINANCE CORRUPTION CREDIT MARKET CREDIT MARKETS CREDIT RATIONING CREDIT REPORTING CREDIT SOURCES CREDITOR CREDITORS CREDITWORTHINESS DEALING WITH BANKS DEFAULTS DEVELOPING COUNTRIES EARNINGS EMPLOYEE EMPLOYMENT EMPLOYMENT GROWTH ENDOWMENTS ENTERPRISE FINANCING ENTERPRISE OPERATIONS ENTERPRISE PERFORMANCE ENTERPRISE REGISTRATION EQUIPMENT EXTERNAL FINANCE FINANCIAL ACCESS FINANCIAL ANALYSIS FINANCIAL INFORMATION FINANCIAL INTERMEDIARIES FINANCIAL MARKETS FINANCIAL PRODUCTS FINANCIAL STATEMENTS FINANCIAL STUDIES FINANCING CONSTRAINTS FINANCING SOURCES FORMAL FINANCE FORMAL FINANCIAL INTERMEDIARIES FORMAL FINANCIAL MARKETS FORMAL FINANCIAL SECTOR FORMAL SECTOR LENDERS GOVERNMENT BANKS IMMOVABLE PROPERTY INCOME INCOME TAX INFORMAL CREDIT INFORMAL FINANCE INFORMAL FINANCING INFORMAL LENDERS INFORMAL SECTOR INFORMATION ASYMMETRIES INFORMATION SHARING INTEREST RATES INTERNATIONAL BANK LABOR FORCE LAND REGISTRATION LEGAL SYSTEM LEGISLATION LENDERS LENDING DECISIONS LOAN LOANS TO ENTERPRISES MONEYLENDER MONEYLENDERS PENALTIES PERMANENT EMPLOYEES POLITICAL ECONOMY PORTFOLIO PORTFOLIOS PRIVATE CREDIT PRIVATE SECTOR PRIVATE SECTOR DEVELOPMENT PROBABILITY PRODUCTIVITY PROFITABILITY PROPERTY RIGHTS PROPRIETORSHIP PUBLIC BANKS PURCHASES REGISTRATION PROCEDURES REGISTRY OFFICIALS REGULATION OF ENTRY REGULATORY AUTHORITIES REGULATORY BURDENS REGULATORY ENVIRONMENT REGULATORY SCRUTINY REPAYMENT REPAYMENT CAPACITY RETAINED EARNINGS RURAL CREDIT RURAL CREDIT MARKETS SALES SALES REVENUE SMALL ENTERPRISE SMALL ENTERPRISES SOCIAL SECURITY SOCIAL SECURITY CONTRIBUTIONS SOURCES OF CREDIT SOURCES OF FINANCE TAX ADMINISTRATION TAX BURDEN TAX COLLECTION TAX OBLIGATIONS TAX RATE TAX RATES TAXATION TRADE CREDIT TRADE CREDITOR TRADE CREDITORS TRANSPARENCY WORKING CAPITAL WORTH
Online Access:	http://documents.worldbank.org/curated/en/2007/11/8872634/enterprises-prefer-informal-credit http://hdl.handle.net/10986/7597

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Summary:	This paper tests the hypothesis that enterprises may forgo formal finance in lieu of informal credit by choice. They do so to avoid the additional regulatory scrutiny and harassment that engaging with the formal financial sector invites. We test this hypothesis using enterprise-level data on 3,564 enterprises in 29 countries. In this sample, enterprises finance approximately 57 percent of their working capital requirements with external finance. This external finance comes from formal sources, such as commercial banks (53 percent) and informal sources (42 percent), such as trade creditors, or family and friends. In our sample, 14 percent of enterprises rely exclusively on informal finance. We find that the likelihood of enterprises preferring to only use informal finance is inversely related to the quality of the regulatory environment, particularly the quality of tax administration and overall governance. For example, we find that when an enterprise has been asked for bribes by tax inspectors, it is 17 percent more likely to prefer informal finance.