Access to Trade Credit by Informal Firms in Ghana: Does Locating in Industrial Cluster and Holding Production/Supply Contract Matter?

Abstract

The paper examines the effect of locating in industrial cluster and holding production/ supply contract on access to trade credit by informal firms in Ghana. It employs data from the 2013 World Bank survey of informal firms in Ghana. The results show that trade credit is the most important external source of financing working capital for firms in the informal sector. Binary probit was employed in the econometric analysis. Controlling for firm characteristics, financial characteristics, firms’ largest owners’ characteristics, industrial sector and geographical location, the results show that both locating in industrial cluster and holding production/supply contract significantly increase access to trade credit by informal firms. Other variables significantly associated with access to trade credit include firm age, number of owners, ownership of location, access to loans from banks and friends, and firms’ largest owners’ characteristics – formal employment status, marital status and educational status. Based on the results, policies focused on promoting the development of industrial clusters can help informal firms to mitigate their credit constraint through increased access to trade credit. Informal firms can also mitigate their credit constraint via trade credit by obtaining production/supply contracts.

Keywords: Trade Credit, Informal Firms, Industrial Cluster, Supply Contract, Probit, Ghana