Informal Firms and Financial Inclusion : Status and Determinants

Many firms in the developing world -- including a majority of micro, small, and medium enterprises -- operate in the informal economy. The informal firms face a variety of constraints, making it harder for them to do business and grow. Lack of access to finance is often cited as the biggest operational constraint these firms face. This paper documents the use of finance and financing patterns of informal firms, highlights differences between use of finance by formal and informal firms, and identifies the most significant characteristics of informal firms that are associated with higher use of financial services. The analysis shows that use of loans and bank accounts for business by informal firms is very low and a vast majority finances their day-to-day operations and investments through sources other than financial institutions (internal funds, moneylenders, family, and friends). A majority of informal firm owners would like their firms to become formal but do not do so as it would require them to pay taxes. Registered firms are 54 percent more likely to have a bank account and 32 percent more likely to have loans. Results also show that firm size, the level of education of the owner, and whether the owner has a job in the formal sector are significantly associated with financial inclusion of informal firms.

Bibliographic Details

Main Author:	Farazi, Subika
Language:	English en_US
Published:	World Bank, Washington, DC 2014-02
Subjects:	ACCESS TO CREDIT, ACCESS TO FINANCE, AGRICULTURAL ACTIVITIES, ALLOCATION OF CREDIT, APPLICATION PROCEDURES, BANK ACCOUNT, BANK ACCOUNTS, BANK FINANCING, BANK LOAN, BANKS, BUSINESS ACTIVITIES, BUSINESS ACTIVITY, BUSINESS ENVIRONMENT, BUSINESS ENVIRONMENTS, BUSINESS LOAN, BUSINESS OWNERS, CAPITAL MARKET, CAPITAL MARKET DEVELOPMENT, CAPITAL MARKETS, CAPITAL REQUIREMENT, COLLATERAL, COLLATERAL REQUIREMENT, COLLATERAL REQUIREMENTS, COMPANY, CORPORATION, CORRUPTION, COUNTRY RISK, CREDIT ACCESS, DEPOSIT, DEPOSIT MONEY BANKS, DEVELOPING COUNTRIES, DUMMY VARIABLE, EARNINGS, ECONOMIC ACTIVITIES, ECONOMIC ACTIVITY, ECONOMIC AGENTS, ECONOMIC GROWTH, EMERGING ECONOMIES, EMPLOYMENT, ENTERPRISE FINANCE, ENTREPRENEURIAL ACTIVITY, ENTREPRENEURS, EXCLUSION, EXPENDITURE, FAMILIES, FINANCES, FINANCIAL ACCESS, FINANCIAL AGENCIES, FINANCIAL DEVELOPMENT, FINANCIAL INSTITUTION, FINANCIAL INSTITUTIONS, FINANCIAL PRODUCTS, FINANCIAL SECTOR DEVELOPMENT, FINANCIAL SERVICES, FINANCIAL SYSTEM, FIRM SIZE, FIRMS, FORMAL SECTOR BUSINESS, GENDER, GOVERNMENT REGULATION, GROSS DOMESTIC PRODUCT, HIGH INTEREST RATES, HIGHER EDUCATION LEVELS, INCOME GROUPS, INCOME TAXES, INFORMAL ECONOMIES, INFORMAL ECONOMY, INFORMAL WORKERS, INSURANCE, INTERNAL FUNDS, INTERNATIONAL BANK, INTERNATIONAL FINANCE, INTERNATIONAL FINANCIAL STATISTICS, INVESTMENT FINANCING, JOB SECURITY, JUDICIAL SYSTEM, LABOR MARKETS, LACK OF ACCESS, LACK OF INFORMATION, LACK OF PROPERTY, LAND TITLING, LAWS, LEGAL FRAMEWORK, LEGAL PROTECTION, LEGAL REQUIREMENTS, LEGAL SYSTEM, LEGAL SYSTEMS, LOAN, LOAN APPLICATION, LOCAL CURRENCY, LOCAL MARKET, MARKET DEVELOPMENT, MEDIUM ENTERPRISES, MFI, MFIS, MICROFINANCE, MICROFINANCE INSTITUTION, MICROFINANCE INSTITUTIONS, MINIMUM CAPITAL REQUIREMENT, MINIMUM WAGES, MONETARY FUND, MONEYLENDER, MONEYLENDERS, NEW BUSINESS, OVERDRAFT, OVERDRAFT FACILITY, PENSION, PHYSICAL CAPITAL, PRIVATE CREDIT, PRIVATE PROPERTY, PRODUCTIVITY, PROFITABILITY, PROPERTY RIGHTS, PUBLIC INVESTMENTS, REGIONAL DUMMY, REGISTRATION REQUIREMENTS, REGULATORY FRAMEWORKS, RETAINED EARNINGS, RISK OF EXPROPRIATION, RULE OF LAW, SHADOW ECONOMIES, SHADOW ECONOMY, SMALL FIRMS, SME, SOCIAL SECURITY, SOURCE OF INCOME, START-UP, START-UP COSTS, STATE INTERVENTION, SUPPLIERS, TAX, TAX POLICY, TAXATION, TRADE CREDIT, VARIABLE COSTS, VILLAGES, WORKING CAPITAL,
Online Access:	http://documents.worldbank.org/curated/en/2014/02/18937100/informal-firms-financial-inclusion-status-determinants https://hdl.handle.net/10986/17322
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