Small Business Performance: Is It Access to Formal or Informal Credit that Matters?

Small Business Performance: Is It Access to Formal or Informal Credit that Matters?

Author: 
Mutsonziwa, Kingstone
Place: 
Oxon
Publisher: 
Taylor and Francis
Date published: 
2021
Record type: 
Responsibility: 
Ashenafi Beyene Fanta, jt. author
Journal Title: 
Journal of African Business
Source: 
Journal of African Business Vol 22 No 4 2021 pp. 550-563
Abstract: 

While literature is clear on the role of finance in small business survival and growth, the relative importance of formal and informal credit in small business growth remains contentious. While earlier studies report the importance of formal credit in driving growth of firms of all sizes, recent studies find informal credit to drive the growth of only small businesses. The aim of this paper is therefore to contribute to the debate by bringing the context of four developing economies in the Southern African Developing Community (SADC) using the FinScope surveys on 10,830 Micro Small and Medium Enterprises (henceforth MSMEs). To address selection bias caused by various factors affecting small business participation in the formal/informal credit market, we used propensity score matching (PSM) where we paired small businesses from the two groups. We examined the effect of access to formal/informal credit on business performance using Average Treatment Effect (ATE) as well as Average Treatment effect on the Treated (ATT). Our results suggest that firms accessing formal credit tend to exhibit better performance in Zimbabwe but a similar performance gain was not observed in the rest of the countries. For informal credit, our results show that firms accessing informal credit tend to perform less than those without access, suggesting value depletion effect of informal credit.

Language: 

CITATION: Mutsonziwa, Kingstone. Small Business Performance: Is It Access to Formal or Informal Credit that Matters? . Oxon : Taylor and Francis , 2021. Journal of African Business Vol 22 No 4 2021 pp. 550-563 - Available at: http://library.au.int/small-business-performance-it-access-formal-or-informal-credit-matters