Informal or Formal Financing? Or Both? First Evidence on the Co-Funding of Chinese Firms

Degryse, Hans; Lu, Liping; Ongena, Steven

doi:10.2139/ssrn.2289779

Cited by 10 publications

(5 citation statements)

References 47 publications

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“…On the bank side, our findings suggest that in order to avoid such credit contractions domestic banks may have to be discouraged somewhat from overly relying on wholesale borrowing and that further regulatory changes should encourage foreign banks to move towards a business model whereby new lending by subsidiaries is more financed by domestic funds (Kolev and Zwart (2013)). On the firm side, our findings may qualify past government policies in many developing countries that unilaterally pushed for formal corporate financing, and hence promoted firm credit-dependency while repressing reliance on informal financing (Ayyagari, Demirgüç-Kunt and Maksimovic (2010), Degryse, Lu and Ongena (2013)). These policies come at a cost of exposing firm financing and performance to domestic and international credit shocks and hence by increasing their variability and vulnerability.…”

Section: Discussionsupporting

confidence: 58%

Shocks Abroad, Pain at Home? Bank-Firm Level Evidence on the International Transmission of Financial Shocks

2013

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We study the international transmission of shocks from the banking to the real sector during the global financial crisis. For identification, we use matched bank-firm level data, covering mainly small and medium-sized firms in Eastern Europe and Turkey, and exploit the Lehman failure. We find that internationally-borrowing domestic and especially foreign-owned banks contract their credit more during the crisis than locally-funded domestic banks do. Firms dependent on credit and with a relationship with internationally-borrowing domestic or foreign banks suffer more in their financing and real performance; especially when single-bank, small or with limited tangible assets. Moreover, firms in countries with lower financial development, more reliance on foreign funding and slower contract enforcement are more affected. Overall our results suggest the existence of spillovers to the real sector through an international banking channel but with heterogeneous effects across firms and countries.

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Section: Discussionsupporting

confidence: 58%

Shocks Abroad, Pain at Home? Bank-Firm Level Evidence on the International Transmission of Financial Shocks

2013

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“…Although scholarly research in this area is limited, our results corroborate previous findings such as those by Ayygari et al (2010Ayygari et al ( , 2011, Butler and Cornagia (2011), Khandker et al (2013), Lakuma et al (2019), Lee et al (2020), Ratnawati (2020) and Degryse et al (2013). That is, access to formal finance accelerates firm growth, and increases productivity and the decision to start a microenterprise.…”

Section: Gologit Resultssupporting

confidence: 91%

“…Their evidence further indicates that the use of informal finance is associated with higher growth of rural microenterprises with employees but has no effect on those microenterprises without employees. These results are consistent with Degryse et al (2013) who suggested the simultaneous use of informal and formal finance as the optimal choice for small firms in China and also pointed out that the role of informal…”

Section: Empirical Literature Reviewsupporting

confidence: 91%

Financial inclusion and performance of MSMEs in Eswatini

Fomum

Opperman

2023

IJSE

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PurposeMicro, small and medium-sized enterprises (MSMEs) are the backbone of economic development for every economy. They contribute to local economic development through household wealth creation, employment generation and poverty reduction. Despite this pivotal role, MSMEs lack access to finance, and scholarship on the enabling role of financial inclusion on micro, small and medium-sized enterprises' performance is scant. The authors contribute to closing the knowledge gap by examining the enabling effect of financial inclusion on MSMEs using the FinScope MSME 2017 survey for the Kingdom of Eswatini. This paper aims to discuss the aforementioned objective.Design/methodology/approachThe study used the re-centered influence function regression framework to estimate unconditional quantile regressions and the generalized ordered logit model to analyze the data.FindingsThe findings from the unconditional quantile regression revealed that small changes in access to bank accounts, saving for business, formal saving, stokvel and informal saving at the 50th and 75th percentiles have a positive and statistically significant effect on microenterprises' annual turnover profit. Conversely, small changes in formal insurance have a mixed effect on annual turnover profit. At the 10th and 25th percentiles, a small increment in insurance reduces annual turnover profit but increases microenterprise annual turnover profit at the 75th percentile. Meanwhile, the evidence from the generalized ordered logit model showed that financial inclusion reduces the likelihood of microenterprises being classified as least developed and increased the chances of microenterprises falling into emerging and developed business categories.Research limitations/implicationsThis study makes use of a cross-sectional survey dataset, as a result, it does not infer causal relationships over the long term, but rather an association between the independent and dependent variables.Practical implicationsOverall, formal and informal financial inclusion enhances the annual turnover profit for microenterprises, particularly at the 50th and 75th percentiles in the Kingdom of Eswatini. The authors recommend a specialized institution such as a micro, small and medium-sized partial credit guarantee scheme to improve the quality and affordability of credit for microenterprises, and a mix of financial and non-financial supports depending on the development stage to boost a sustainable microenterprises' sector.Originality/valueThe study uses two advanced cross-sectional techniques, the recentered influence function framework and the generalized ordered logit model to analyze the data. The paper is original and contributes to the discussion of the role of financial inclusion in enabling microenterprises' success in Africa, using the FinScope 2017 survey of microenterprises in Eswatini as a case study.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-10-2020-0689.

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“…The second channel relates to the complementarity between formal and informal credit, recently documented for Chinese firms by Degryse et al (2013). Many households, far from considering private loans a surrogate for formal credit, use informal financing together with traditional financing.…”

Section: Informal Loans and Access To The Credit Marketmentioning

confidence: 99%

Informal loans, liquidity constraints and local credit supply: evidence from Italy

2021

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Using data from the Italian Survey on Household Income and Wealth from 1995 to 2014, we study the relation between informal credit (loans from relatives and friends) and a household's access to bank credit. While most of the literature has focused on the substitutability channel, we highlight that even households with full access to the formal credit market are more likely to be indebted to relatives or friends when compared to those not interested in formal loans. This complementarity is stronger for households who have problems paying back their loans, suggesting the presence of a caretaker effect on the part of relatives and friends towards distressed families. Finally, we estimate the overall impact of an expansion of local credit supply on the diffusion of informal loans, using an IV approach. The results suggest that the complementarity effect prevails, but the positive effect on informal loans is economically very small.

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Informal or Formal Financing? Or Both? First Evidence on the Co-Funding of Chinese Firms

Cited by 10 publications

References 47 publications

Shocks Abroad, Pain at Home? Bank-Firm Level Evidence on the International Transmission of Financial Shocks

Shocks Abroad, Pain at Home? Bank-Firm Level Evidence on the International Transmission of Financial Shocks

Financial inclusion and performance of MSMEs in Eswatini

Informal loans, liquidity constraints and local credit supply: evidence from Italy

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