Bank Competition and Credit Access: The Case of Informal Firms in Sub-Saharan Africa

Abstract

Purpose of the study: This paper investigates the impact of bank competition on access to finance by informal firms in 14 sub-Saharan African countries, using World Bank enterprise survey data. Access to finance is one of the main factors identified as hindering the growth of opaque borrowers, who are generally characterised by poor financial transparency.

Methodology: This study uses a discrete binary choice probit model to estimate the probability or likelihood of accessing finance, conditional on the level of bank competition and other firm-level characteristics.

Findings: Results show that the impact depends on the competition measure used. The Lerner index shows a positive relationship supporting the information-based hypothesis, while the most robust competition indicator, the Boone index, is negative in line with the market power hypothesis. These results also show that reducing or minimising information asymmetry using public credit registries is good for enhancing financial access.

Research implications: Improving the competitiveness of the banking sector by encouraging the entrance of more players should be promoted without compromising the soundness of the sector. Measures should be introduced to control anti-competitive behaviour in the banking industry.

Originality: The informal sector contributes close to 50% to Africa’s GDP and 80% towards employment and, therefore, strategies aimed at eliminating the obstacles faced by these firms are important for livelihood protection. Many studies done on the African banking industry have generally found it to be less competitive and this affects financial access since banks tend to be risk averse in such settings. There are also few studies that have analysed the relationship between bank competition and credit access in the informal sector, mostly because publicly available data on these firms are scarce.