Does Bank Competition Affect Credit Access in Sub-Saharan Africa? Evidence from World Bank Informal Firms Surveys

ABSTRACT

This paper investigates the impact of bank competition on access to credit by informal firms in 14 Sub Saharan African countries using World Bank enterprise survey data. Access to credit is one of the main factors identified as hindering the growth of these opaque borrowers with poor financial transparency. This study uses a 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. Results show that the impact of competition measured using the recent and empirically robust Boone indicator is negative and significant in line with the market power hypothesis. These results suggest that improving the competitiveness of the banking sector by encouraging entrance of more players and curbing anti-competitive conducts should be promoted without compromising the soundness of the sector. Reducing or minimizing information asymmetry using public credit registries is good for enhancing financial access and governments should invest resources on maintaining, updating and increasing the coverage of these registries.

KEYWORDS:

• Competition
• credit access
• informal firms
• ssa

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ This study looks at 14 SSA countries whose surveys were carried out between 2009 and 2018. We dropped surveys done before 2009 as they are a bit old.

² Bank use two types of information (hard and soft information). Hard information is quantitative and obtainable using balance sheets income statements, score cards etc. while soft information is qualitative and informed by bank borrower relationship (judgment, opinions notes reports etc).

³ Services include hairdressing, cleaning and washing, transport, internet services, street vending, construction etc.

⁴ We use the 2018 United Nations Income classification categories.

⁵ We use these different measures of competition for robustness purposes but the Boone indicator is the most recent and better measure.

⁶ Although the Lerner index has been widely used in the empirical literature, the theoretical foundations of the index as a competition measure are not robust (Boone, 2008). Amir (2000), Bulow and Klemperer (1999), Rosenthal (1980) and Stiglitz (1989), for example, present models where more intense competition leads to higher instead of lower Lerner index values

⁷ We do not reproduce this theoretical model here to save space and also because doing so adds little value to the paper.

⁸ This include number of individuals and firms listed in public credit registry or by a private credit bureau with current information on repayment history, unpaid debts or credit outstanding. This data is from Global Financial Development reports. This helps financial firms make prudent lending decisions

Additional information

Funding

This work was supported by the National Research Foundation [96005].