MA Economics

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Determinants of access to finance: firm characteristics, institutional environment and informal payments
(2016-06) Timbang, Michael O.
Access to finance is crucial to economic development. The important policy question is: What determines firms’ access to finance? This paper seeks to address this question by exploring the impact of firm-level characteristics and institutional environment on firms’ access to external finance, as measured by firms’ reliance on bank credit, non-bank financial credit, and informal credit for external financing of working capital, using the firm-level data set of the 2009 World Bank Enterprise Survey in the Philippines. The results provide unprecedented empirical evidence that the firm’s access to bank and non-bank credit is determined by firm-specific characteristics such as the firm’s size, age, technological characteristics, female ownership, and spending on "informal" activities that the firm has to incur as "additional costs" to facilitate its operations in an environment of weak institutions. Meanwhile, firm-level characteristics are not significant determinants of informal credit given that financial sources of this kind are known to be less sensitive to firm characteristics than formal institutions, which extend credit based on observable firm characteristics to mitigate information asymmetry problems.