Credit Constraints in Uganda's Firms: Micro-Economic Evidence

Abstract

The phenomenon of credit accessibility and credit rationing and its consequences for the investment decisions is undoubtedly one of the topical issues, particularly in developing economies. The study hinges on the problem of information asymmetries and agency costs in financial sector operations and investment financing. The analysis is based on the World Bank's 1999 firm survey data. Information on firms that had demanded for bank credit and were either granted or denied is used in a binary choice model-Probit- explaining nature of credit accessibility. The key proposition of the study is that there is discrimination in credit allocation. The empirical evidence is that credit from banking sector is firm specific, sector influenced and that small firms find it most difficult to get loans from financial institutions perhaps because agency, information, enforcement and transactions costs are higher. Perhaps, a fundamental policy concern is the fact that firms engaged in agriculture are less likely to obtain credit and yet agriculture is arguably Uganda's engine of growth.


Eastern African Journal of Rural Development