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- Can informal firms hurt registered SMEs’ access to credit?Publication . Distinguin, Isabelle; Rugemintwaria, Clovis; Tacneng, RuthUsing firm-level survey responses from 2009 to 2012, we examine whether competitors from the informal sector affect the credit constraints of registered SMEs in 86 countries worldwide. We also investigate the role played by the quality of institutional environment in exacerbating or in alleviating such effect. A weak quality of institutional environment strengthens inter-linkages between the formal and the informal sectors, increases the costs and decreases the benefits assumed by formal firms, and reduces the costs attributed to informality. Moreover, it also results in a large informal economy, which influences perceptions about the substitutability between formal and informal goods, and law evasion. Our findings indicate that registered SMEs facing competition from informal firms are more likely to be credit-constrained than other formal SMEs that are not confronted with such competition. This result is consistent with the “parasite” view and the entrepreneurial perspective of informality, which assert that informal firms are capable of competing against registered SMEs and hurting the latter’s profits. Further, we find that such adverse impact manifests only in countries with weak rule of law and high degree of corruption and bureaucracy. Our results also show that registered micro and small firms are more likely to be affected by the presence of informal firm competitors than medium-sized firms. This is because the benefits of formality that include access to credit from financial institutions, increase with firm size. On the whole, our findings suggest that governments must enhance their role in increasing access to credit to smaller firms and in providing incentives for informal firms to be integrated in the formal economy. Moreover, in order to achieve inclusive growth, our results highlight the importance of improving the business environment, which affects all entrepreneurs.
- Assessing mandated credit programs: case study of the Magna Carta in the PhilippinesPublication . Jacildo, Ryan; Khor, Niny; Tacneng, RuthWe examine the effects of a mandated credit program to small and medium enterprises in the Philippines (Magna Carta Law) using a panel dataset compiled from official data published by the Bangko Sentral ng Pilipinas. The final sample of 109 financial institutions represented over 90% of total finance sector assets in the Philippines. We highlight three important findings. First, although the total lending levels to micro, small, and medium enterprises (MSMEs) grew slightly, the percentage shares of loans allocated to MSMEs declined drastically from a peak of 30% of total loans in 2002 to 16.4% in 2010. Second, following the upwards revision of the loan target (from 6% to 8%) for smaller firms in 2008, there was a sharp increase in noncompliance especially amongst universal and commercial banks. On the other hand, total loans to medium enterprises were still more than threefold larger than the targeted 2%. Third, there is an increased heterogeneity in optimal loan portfolio across banks. Most surprisingly, the absolute level of MSME lending by rural and cooperative banks declined since 2008. Direct compliance amongst universal and commercial banks decreased beginning in the late 2007, while that of thrift banks increased to almost 100%. Abolishing the Magna Carta targets for medium-sized enterprise loans would most likely yield little adverse effects. Meanwhile, efforts to improve financial access to MSMEs should focus on alternative nondistortionary ways to increase financing supply, such as improving institutional framework for informational availability and development of equity and bond markets for MSMEs.