Credit Information Sharing Reforms and Firm Financing

According to the most recent World Bank Enterprise Survey Data, firms in developing countries report that access to finance is the biggest obstacle for the growth of their operations. Across all regions, 17 percent of firms report that access to finance is the biggest obstacle. In some regions, access to finance is an even larger obstacle. For example, in Sub-Saharan Africa close to a quarter of the firms report access to finance to be the top obstacle.

An important impediment to firm financing is asymmetric information: a firm seeking to borrow from a lender in the credit market has better information about its financial state and its ability and willingness to repay the loan than the lender. Asymmetric information can lead borrowers less seriously intent on repaying loans to be more willing to seek out loans (adverse selection) and borrowers to use loaned funds in ways that are inconsistent with the interest of the lender (moral hazard). Seminal work by Stiglitz and Weiss (1981) shows that under asymmetric information the equilibrium interest rate is such that demand for credit exceeds supply - even borrowers willing to pay the market equilibrium interest rate are not able to get a loan (credit rationing).

Credit information sharing schemes are mechanisms that can help lenders and borrowers overcome asymmetric information problems because they allow lenders to share with other lenders information about their clients, either through a privately held credit bureau (CB) or publicly regulated credit registry (CR). Such credit information schemes typically disseminate knowledge of payment history, total debt exposure, and overall credit worthiness, thus bridging the information divide between lender and borrowers.

Using multi-year firm-level surveys for 63 countries covering more than seventy five thousand firms, over the period 2002-2013, Sandeep Singh and I have recently completed a paper empirically analyzing the impact of introducing credit information sharing schemes on firms’ access to finance. ¹ We also examine how the coverage, scope and accessibility of the credit information sharing scheme as well as the strength of the contractual environment affect the impact of credit information sharing reforms on firms’ access to finance. Our analysis also investigates whether credit information sharing reforms impact different firms differently. In particular, we distinguish firms by their size, experience, and opacity. Finally, to test the robustness of our results, we conduct firm-level panel estimations where we are able to control for time invariant firm-level heterogeneity and we run instrumental variable estimations where we explicitly instrument for the likelihood of CB reforms.
Our results reveal that CB reforms, but not CR reforms, have an effect on firm financing. After the introduction of a CB, the likelihood that a firm has access to finance increases, interest rates drop, maturity lengthens, and the share of working capital financed by banks increases. These effects are not only statistically but also economically significant. The introduction of a credit bureau is associated with a 7 percentage point increase in the probability that a firm will have access to credit, a 5 percentage points decline in the interest rate charged on loans, a 7 month extension in loan maturity, and a 4 percentage point increase in the fraction of working capital financed by banks. The effects of CB reform are more pronounced (i) the greater the coverage of the CB and the scope and accessibility of the credit information sharing scheme and (ii) the weaker the contractual environment. We also find some evidence that CB reform effects are more pronounced for smaller, less experienced, and more opaque firms. Finally, we find that our results do not change significantly when we focus on a smaller firm-level panel data where we can control for firm-fixed effects or when we explicitly instrument for the introduction of CB reforms.