What determines financial constraints in Egypt? · This presentation 1 Motivation 2 Conceptual considerations 3 Empirical strategy 4 Data 5 Results Financial constraints in Egypt

What determines financial constraints in Egypt?

Frank Betz1 Farshad Ravasan2 and Christoph Weiss1

1European Investment Bank

2PSE

24 October 2018

The research summarized in this presentation was supported by the EIB Institute

through its STAREBEI programme.

Financial constraints in Egypt 24 October 2018 1 / 24

Why do we care?

Figure: Financially excluded firms remainsmall

Figure: Egypt has many financiallyexcluded firms


Why do financially excluded firms remain small?

Figure: Financially excluded firms lesslikely to invest

Figure: Investments of unbanked firmsdependent on internal finance


Why do firms remain unbanked?

Egypt is one of the largest unbanked economy according to Mastercard

94% of financial transactions done in cash

only 35% of 82 million Egyptians have a bank account

Unbanked forms operate on a semi-formal basis. This way of operating

may help firms to save on taxes

but aggravates information asymmetries

Operating on a informal (or semi-formal) basis can be optimal if

intermediation capacity of the banking system is low (Straub, 2005)

opportunity costs in the form of lost growth are low, for instancebecause entrepreneurs are less skilled (Gennaioli et al. 2013)


Results

Crowding out is not associated with changes in the share of unbankedfirms (firms that open an account between 2013 and 2016)

However, crowding out is associated with credit constraints (increasein the share of firms that are discouraged or rejected when applyingfor external finance)

CEO education and experience is positively associated with financialinclusion (increase in the share of firms with an account, in particularyoung firms) and negatively associated with credit constraints

The GAFI (General Authority for Investment) one-stop-shopprogramme is positively associated with financial inclusion (inparticular for firms reporting the court system is quick and fair)


This presentation

1 Motivation

2 Conceptual considerations

3 Empirical strategy

4 Data

5 Results


The costs and benefits of operating formally

When deciding whether to register, firms trade-off the costs and benefitsof operating formally, where costs are given by

taxes

regulations

and benefits come from access to the

judiciary

financial system

We do not have data on unregistered firms but think of unbanked firms asoperating on a semi-formal basis.


Implications

Operating on a cash-only basis

helps firms to save on taxes

aggravates information asymmetries

The SME lending programme proposed by Munro (2013) demands thatsmall firms without financial statements run their activities through achecking account for one year to establish a reliable sales figure.

Therefore, firms are more likely to operate on a semi-formal basis if

intermediation capacity of the banking system is low (Straub, 2005)

opportunity costs in the form of lost growth is low


Private sector credit in Egypt: from bad to worse

Figure: The government crowding outthe private sector

Figure: Public debt was partly monetized


Opportunity costs

Entrepreurial human capital and financial literacy

La Porta and Shleifer (2014) find that informal firms tend to be smalland unproductive. They argue that the low levels of productivityreflect lack of skills on the side of the entrepreneurs.

Gennaioli et al (2013) document a strong association betweenentrepreneurial human capital and firm productivity.

Institutions

Acemoglu et al (2001) argue that secure property rights are adeterminant of economic growth. If entrepreneurs cannot reap thereward for their efforts they will not invest in the first place.

Using data from five Eastern European countries Johnson et al (2002)find that the perceived strength of property rights affects thewillingness of entrepreneurs to reinvest their profits.


Outline

1 Motivation



4 Data

5 Results


Financial inclusion

To examine financial inclusion we estimate the following regression:

∆accounti = β1 ∗ crowdingouti + β2 ∗ ∆CEOeducationi

+ β3 ∗ ∆CEOexperiencei + γ ∗ Xi + Ui

Where

accounti equals 1 if the firm has a checking or savings account

The ∆-prefix indicates the difference between the value in 2016 and2013 (the two waves of the survey for Egypt)

crowdingouti measures local supply of credit

CEOeducationi is likely to change with CEO, thus all specificationalso control for CEO experience.


Credit constraints

To examine credit constraints we estimate the following regression:

∆constrainedi = β1 ∗ crowdingouti + β2 ∗ ∆CEOeducationi

+ β3 ∗ ∆CEOexperiencei + γ ∗ Xi + Ui

Only firms that have demand for credit can be credit constrained.

In a second step we use liquidity shocks to instrument credit demand.Candidate instruments:

Loss due to spoilage

Loss due to informal gift request

Loss due to power outage

Last step: Generalize to SN using 2013 cross-section of MENA ES


Outline

1 Motivation



4 Data

5 Results


Firm-level data

Firm-level data come from the MENA Enterprise Survey

The MENA ES is a representative firm-level survey financed jointly byEIB, EBRD, and the World Bank and conducted in 2013

The finance module of the survey asks firms whether they

have a checking or savings accountare credit constrained (rejected or discouraged)

The survey also includes information on

firm characteristicseducational attainment and experience of the managerbusiness environment and institutional quality

In 2016, a follow-up survey was done in Egypt

longitudinal data (panel firms)information on the use of the GAFI one-stop-shop in last two years


Complementary data sources

The crowding-out index draws on information

on the location of bank branches

on bank security holdings and loans from Orbis BankFocus

and is computed as follows

crowdingoutj =2015∑

t=2013

sj ,t − lj ,t∑j aj ,t

−2012∑

t=2010

sj ,t − lj ,t∑j aj ,t

where sj ,t and lj ,t denote security holdings and loans of bank j and∑j aj ,t refers to total assets in the banking system.


Bank balance sheets

Focus on the following banks:

Public

National Bank of Egypt

Banque Misr

Banque du Caire

Private

CIB

Foreign

QNB

HSBCFigure: Government debt mainly held bypublic banks


Spatial distribution of firms and bank branches

(a) Sample firms (b) Public banks

(c) Private banks (d) Foreign banks


Outline

1 Motivation



4 Data

5 Results


Financial inclusion

(1) (2) (3) (4)∆ Account ∆ Account ∆ Account ∆ Account

Crowding out index -0.065(0.07)

∆ CEO university education 0.099∗ 0.104∗ 0.022 0.102∗

(0.06) (0.05) (0.06) (0.05)∆ CEO experience 0.055∗∗ 0.048∗∗ 0.041 0.036

(0.02) (0.02) (0.03) (0.02)Share neighbouring firms with account 0.057∗

(0.03)Young (less than 5 years) -0.036

(0.06)Young × ∆ CEO education 0.282∗∗

(0.12)Young × ∆ CEO experience 0.047

(0.07)Political instability major -0.147∗∗

obstacle in 2013 (0.06)Firm characteristics Yes Yes Yes Yes

Observations 482 482 482 477


Financial inclusion and the One-Stop-Shop programme

(1) (2) (3)∆ Account ∆ Account ∆ Account

Crowding out index -0.028 0.011 0.004(0.05) (0.06) (0.06)

∆ CEO university education 0.115∗∗ 0.129∗∗ 0.127∗∗

(0.06) (0.06) (0.06)∆ CEO experience 0.050∗∗ 0.051∗∗ 0.046∗

(0.02) (0.02) (0.02)One-stop-shop programme 0.101∗ 0.173∗∗ 0.179∗∗∗

(0.06) (0.07) (0.07)∆ Court system is quick 0.003

(0.09)One-stop-shop × ∆ Court quick 0.262∗

(0.16)∆ Court system is fair, impartial -0.090and uncorrupted (0.06)One-stop-shop × ∆ Court fair 0.294∗∗∗

(0.11)Firm characteristics Yes Yes Yes

Observations 472 470 470


Credit constraints

(1) (2) (3) (4) (5)∆ Constrained ∆ Discouraged ∆ Rejected ∆ Constrained ∆ Constrained

Crowding out index 0.130∗∗ 0.121∗∗ 0.009 0.106∗ 0.138∗∗

(0.06) (0.06) (0.01) (0.06) (0.07)∆ CEO University education -0.137∗∗ -0.177∗∗∗ 0.040∗∗∗ -0.124∗∗ -0.230∗∗∗

(0.06) (0.06) (0.01) (0.06) (0.09)∆ CEO experience -0.023 -0.039 0.017∗∗∗ -0.019 0.004

(0.03) (0.03) (0.01) (0.03) (0.03)∆ Ownership -0.195∗∗ -0.195∗∗ -0.000 -0.208∗∗ -0.136

(0.08) (0.08) (0.02) (0.08) (0.10)∆ Exporter -0.166∗∗ -0.147∗∗ -0.019 -0.190∗∗∗ -0.171∗∗

(0.07) (0.07) (0.02) (0.07) (0.07)∆ Audit -0.107∗∗ -0.098∗∗ -0.009 -0.095∗ -0.071

(0.05) (0.05) (0.01) (0.05) (0.06)Young (less than 5 years) 0.063 0.052 0.011 0.058 0.035

(0.06) (0.06) (0.02) (0.06) (0.08)Small (less than 20 employees) -0.039 -0.048 0.008 -0.020 -0.027

(0.05) (0.05) (0.01) (0.05) (0.06)Small town -0.080 -0.095 0.015 -0.141 -0.152

(0.16) (0.16) (0.04) (0.16) (0.19)Share neighbouring firms with loan -0.004 0.010 -0.014 0.052 0.012

(0.21) (0.21) (0.05) (0.21) (0.27)Share neighbouring firms with demand -0.094 -0.171 0.077∗∗ -0.137 -0.237

(0.15) (0.15) (0.04) (0.15) (0.20)∆ Account -0.084∗

(0.05)Firm characteristics Yes Yes Yes

Observations 486 486 486 482 338


Instrumenting credit demand

(1) (2) (3) (4)∆need ∆ Constrained ∆ Discouraged ∆ Rejected

∆ Need 0.732∗∗∗ 0.658∗∗∗ -0.002(0.17) (0.18) (0.08)

Crowding out index 0.053 0.089∗∗∗ 0.082∗∗ 0.014(0.06) (0.03) (0.04) (0.01)

∆ CEO University education -0.110∗ -0.058∗ -0.104∗∗∗ 0.036∗∗

(0.06) (0.03) (0.03) (0.02)∆ CEO experience 0.006 -0.032∗∗ -0.046∗∗∗ 0.017∗∗

(0.03) (0.01) (0.01) (0.01)

Any loss due to spoil in 2015 0.238∗∗

(0.11)Any loss due outage in 2015 0.068

(0.08)Any loss due to informal gift 0.151∗

request in 2015 (0.09)Interview after Nov 2016 0.103(currency devaluation) (0.08)Firm characteristics Yes Yes Yes Yes

Observations 486 486 486 486


Regional results for 2013

OLS Heckman

(1) (2) (3) (4)Constrained Discouraged Constrained Discouraged

Crowding out index 0.075∗ 0.094∗∗ 0.097∗ 0.107∗∗

(0.04) (0.04) (0.05) (0.05)CEO university education -0.139∗∗∗ -0.135∗∗∗ -0.158∗∗∗ -0.146∗∗∗

(0.04) (0.04) (0.05) (0.05)CEO experience -0.000 -0.002 -0.012 -0.009

(0.02) (0.02) (0.02) (0.02)

Need

Any loss due to power outage 0.288∗∗∗ 0.309∗∗∗

(0.11) (0.11)Any loss due to informal gift request 0.200 0.216

(0.14) (0.14)Firm characteristics Yes Yes Yes YesBank characteristics Yes Yes Yes Yes

Only firms withneed for external finance

Observations 1440 1440 3748 3748


Documents

What determines financial constraints in Egypt? · This presentation 1 Motivation 2 Conceptual considerations 3 Empirical strategy 4 Data 5 Results Financial constraints in Egypt