Firms grow much more slowly in developing countries compared to the ones in developed countries. An important barrier to firm growth in developing countries is limited access to financing, especially for SMEs (small and medium enterprises) that make up a large share of these economies. Trade credit, offered by a supplier to allow its customer to pay on credit, is an important form of firm borrowing, especially in countries with underdeveloped financial institutions. In developing countries trade credit appears to be limited due to information asymmetry (i.e. parties involved in an economic transaction have scanty or different pieces of information on each other) and weak formal contract enforcement. Many suppliers reported having high screening costs when deciding to give trade credit to downstream firms (i.e. a company that buys from suppliers and who sells products to consumers) to minimize the chance of defaults. These costs can prevent many win-win transactions to take place and lead to misallocation of capital. This project therefore aims to answering whether a trade credit information bureau for SMEs in Kenya improves efficiency in the trade credit market by helping productive firms access more credit, as well as increases repayment incentives of all firms.
In partnership with Metropol (a local business information and credit management company), the project will be surveying SMEs and their suppliers on firm characteristics and information on trade credit and repayment, delivering the treatment intervention to a random subset of SMEs who consented to participate in the study, and collecting outcome measures 6 months after the intervention. The intervention involves visiting SMEs and introducing them to Metropol’s trade credit bureau service including the free/subsidized credit reports they can get, which they can show to suppliers. The hypothesis is that the service, which reduces the cost of potential suppliers learning about a firm's payment history, will have two effects: a disciplining effect and a reduced screening cost effect. Both effects should improve the ability of firms to transact and lead to firm growth.
Credit constraint faced by firm is a highly policy relevant issue in developing countries, as it hinders industrial development, employment and productivity growth. Information asymmetry has been hypothesized as an important factor contributing to credit constraint. This project will help us learn whether information friction poses a serious challenge to the functioning of credit markets in developing countries, and whether establishing infrastructure to facilitate information sharing (e.g. trade credit bureaus) improves efficiency in this market.
