Credit access, constraint and default: evidence from small scale enterprises in urban Liberia

Abstract

Small enterprises in the post-war Liberia have huge potential of reversing the negative consequences of conflict and spurring economic growth. However, they are trapped in financing difficulties that impede their investment financing and expansion. This study reinforces the discussion that the credit market of Liberia is segmented and underdeveloped, with high level of asymmetric information, which has implications for screening errors in processing of loans, credit market participation and access, and credit default. Therefore, development of credit market is critical to successful credit intervention, because it reflects the strength of regulatory system; appropriateness of prudential guidelines; efficient pricing of credit and ultimate ability of the small firms to participate in the credit market. The thesis focuses on post-war period, looking at credit market participation; credit constraint and credit default in order to facilitate holistic integration of small enterprises in credit programs of Liberia. The thesis contributes to literature by providing support to existing theories and presenting new evidence on the contextual nature of interaction between small firms and credit market in a post-war economy. Micro-econometric models and firm level data gathered from surveying of small-scale firms using the Liberia National Account of the Establishment Survey were used for analysis. The thesis answers the following specific research questions: What factors influence credit market participation and access to desired credit amount? What characterizes small enterprises credit constraint and determine being credit rationed, rejected and discouraged? And what determines the probability and extent of credit default? The key findings indicate that credit market participation, access to credit, credit constraint and default are influenced by a diversity of factors such as credit market variables, skill/experience of managers, firm size, firm performance indicators and market environment that defines firm operations. Hence, easing restrictive credit requirements, strengthening prudential guidelines in regulatory systems, sensitizing borrowers, supporting a knowledgeable and growing entrepreneurial culture are critical in developing credit markets, thus relaxing financial constraints and reducing default. That notwithstanding, future research should be directed to analyzing the supply side component of credit demand; exploring the effect of rent-seeking on small firms' productivity and assessing default relative to loan rollover.