Executive Summary of Evaluation Name of Evaluation The Impact of Credit Information on Firm Financing Date of Final Report of Evaluation August 2014 Miriam Bruhn, Sole Martinez Peria, Claudia Ruiz Ortega, Author of Final Report of Evaluation Sandeep Singh Date of this Executive Summary January 5, 2015 Luis Domenech, IFC CDI Department, ldomenech@ifc.org Author of this Executive Summary Shalini Sankaranarayan, Ssankar1@ifc.org Number of pages of this Executive Summary 5 Without content’s modification. Minor typographical Modifications from original Executive Summary corrections Executive Summary Approved for public Name, Organization, email, Day, month, year disclosure by (name) on (date) Background Firms, especially small and medium enterprises (SMEs) state that access to credit is one of the main constraints on their growth. The theoretical literature on credit information emphasizes that information sharing schemes can impact firm financing (see Pagano and Jappelli, 1993; Padilla and Pagano, 1997; Klein, 1992; Vercammen, 1995; Padilla and Pagano, 2000). But the existing evidence is limited and, with few exceptions, subject to identification problems. Objectives This paper explores the impact of credit information sharing reforms on firm financing. The study analyzes the effect of the establishment of private credit bureaus (CBs) and public credit registries (CRs) on five measures of firm financing:  Whether the firm has a loan.  The interest rate charged on the latest loan.  The maturity of the latest loan.  The share of working capital (WC) financed by bank lending.  The share of fixed (FA) assets financed by bank lending. Analysis Data Page 1 of 7 The study combines data from the Doing Business, Enterprise Surveys, and World Development Indicators databases. Doing Business: From internal raw data for the Getting Credit module the study is able to establish which countries have a credit bureau (CB) and/or credit registry (CR) and the year of their introduction. The study also collects data on the scope and quality of the credit information databases by using the depth of credit information index and the percentage coverage of CBs and CRs. Enterprise surveys: The study uses firm-level data for over 75,000 firms from 63 countries across the period 2002-2013 where at least two surveys were conducted. The study focuses on five aspects of firms’ access to finance:  Whether they have a loan, line of credit or overdraft protection.  Interest rate paid on the most recent loan.  Maturity of the most recent loan.  Fraction of working capital financed by banks.  Fraction of fixed assets financed by banks The study also obtains information on different firm characteristics including firm size, age, ownership type, exporter status, and sector World Development Indicators: The study used country-level data on inflation, GDP growth, and credit to the private sector. Methodology The study’s identification strategy relies on the fact that there are countries in the sample that introduced a CB/CR during the survey period and countries that never adopted such credit information sharing schemes. The study uses a quasi-difference-in-difference approach to estimate causal impact:  Treatment group consists of countries where a CB/CR was introduced in between two or more available survey years.  Control group consists of countries with two or more years of Enterprise Surveys, but where CBs/CRs were never introduced. The study includes country fixed effects to control for time-invariant country characteristics that could explain differences across countries in firms’ access to finance. The study includes time fixed effects to control for common time effects that can explain differences in firm financing over time (e.g., global crisis). 11 12 13 1 1 1 Finance Indicator = Credit information reform + X + Z + +γ +ε i,j,t j,t i,j,t j,t j t i,j,t Page 2 of 7 Finance indicator refers to the five measures of firm financing Credit information reform is a dummy variable that take value 1 for treatment countries after reform and 0 otherwise. X is a matrix of firm-level characteristics including firm size, age, ownership type, exporter status, and sector (manufacturing versus services). Z refers to a matrix of country-level variables that might influence firms’ access to finance (i.e., inflation rate, GDP growth rate, private credit/GDP).  are the country fixed effects. γ are time effects. The credit information reform dummy can be thought of as the interaction between a treatment dummy (1 for treatment countries) and a post reform dummy (1 for years after reform). The reform variables along with two way country and time fixed effects makes our empirical methodology akin to a difference-in-difference format, comparing countries with and without reform, and years pre- and post-reform. ε are robust standard errors clustered at country-year level. Sample Credit Credit Control Control Bureau Registry sample for sample for reform year reform CB CR year regressions regressions Country Survey years Albania 2002, 2005, 2007 x x Angola 2006, 2010 x x Armenia 2002, 2005, 2009 2007 2003 Azerbaijan 2002, 2005, 2009, 2013 2005 x Bangladesh 2002, 2007, 2013 x Belarus 2002, 2005, 2008, 2013 2007 x Benin 2004, 2009 x Bosnia-Herzegovina 2002, 2005, 2009, 2013 2007 Botswana 2006, 2010 x Bulgaria 2002, 2004, 2005, 2007, 2009, 2013 2005 Burkina Faso 2006, 2009 x Cameroon 2006, 2009 x Cape Verde 2006, 2009 x China 2002, 2003, 2012 2004 x Colombia 2006, 2010 x Congo 2006, 2010 x x Page 3 of 7 Croatia 2002, 2005, 2007, 2009, 2013 2007 x Czech Republic 2002, 2005, 2009 2002 2002 Ecuador 2003, 2006, 2010 2005 2008 Eritrea 2002, 2009 x x Estonia 2002, 2005, 2009 x Georgia 2002, 2005, 2008, 2013 2005 x Guatemala 2003, 2006, 2010 2004 Guyana 2004, 2010 x x Hungary 2002, 2005, 2009 x Indonesia 2003, 2009 x Jamaica 2005, 2010 x x Kazakhstan 2002, 2005, 2009, 2013 2006 x Kenya 2003, 2007, 2013 2008 x Kyrgyzstan 2002, 2003, 2005 2003 x Latvia 2002, 2005, 2009 2008 x Lebanon 2006, 2013 x Lesotho 2003, 2009 x x Lithuania 2002, 2004, 2005, 2009 x Macedonia 2002, 2005, 2009, 2013 2011 Madagascar 2005, 2009 x Malawi 2005, 2009 x x Mali 2003, 2007, 2010 x Mauritius 2005, 2009 2005 x Mexico 2006, 2010 x Moldova 2002, 2003, 2005, 2009, 2013 2011 x Mongolia 2004, 2009 x Credit Credit Control Control Bureau Registry sample for sample for reform year reform CB CR year regressions regressions Country Survey years Nepal 2009, 2013 x Nicaragua 2003, 2006, 2010 2005 2007 Niger 2005, 2009 x Panama 2006, 2010 x Philippines 2003, 2009 x Poland 2002, 2003, 2005, 2009 x Romania 2002, 2005, 2009 2004 Russia 2002, 2005, 2009 2006 x Rwanda 2006, 2011 2010 Senegal 2003, 2007 x Serbia-Montenegro 2002, 2005, 2009, 2013 2004 x Slovakia 2002, 2005, 2009 2004 Slovenia 2002, 2005, 2009, 2013 2008 South Africa 2003, 2007 x Sri Lanka 2004, 2011 x Tajikistan 2002, 2003, 2005, 2008 x x Tanzania 2003, 2006, 2013 x x Page 4 of 7 Uganda 2003, 2006, 2013 2009 x Ukraine 2002, 2005, 2008, 2013 2007 x Vietnam 2005, 2009 x Zambia 2002, 2007 x x Note: For the Credit Registry/Bureau reform regressions, the treatment sample consists of countries with a Credit Registry/Bureau reform in between two or more years of available Enterprise Survey data. The control sample consists of countries with two or more years of Enterprise Surveys, but where Credit Registry/Bureau do not exist. Results - Impact of CBs Figure 1: Average trend of access variables for treatment and control countries in CB sample Interest rate Access to finance Maturity WK by banks FA by banks Treatment t Control Page 5 of 7 - Impact of CRs Page 6 of 7 Conclusions and Recommendations CB reforms but not CR reforms have an effect on firm financing. After the introduction of a CB:  A larger share of firms has access to finance.  Interest rates drop.  Maturity lengthens.  The share of working capital financed by banks increases. Effects of CB reform are more pronounced the greater the coverage of the CB and the scope and accessibility of the credit information sharing scheme. Some evidence that CB reform effects are more pronounced for younger, smaller and more opaque firms. Copyright and Legal Disclaimer The material in this publication is copyrighted. 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Instead, any issues arising in an IFC-financed project will be evaluated and addressed in the context of the particular circumstances of the project. Page 7 of 7