What determines financial constraints in Egypt? Frank Betz 1 Farshad Ravasan 2 and Christoph Weiss 1 1 European Investment Bank 2 PSE 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
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What determines financial constraints in Egypt? · This presentation 1 Motivation 2 Conceptual considerations 3 Empirical strategy 4 Data 5 Results Financial constraints in Egypt
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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
Financial constraints in Egypt 24 October 2018 2 / 24
Why do financially excluded firms remain small?
Figure: Financially excluded firms lesslikely to invest
Figure: Investments of unbanked firmsdependent on internal finance
Financial constraints in Egypt 24 October 2018 3 / 24
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)
Financial constraints in Egypt 24 October 2018 4 / 24
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)
Financial constraints in Egypt 24 October 2018 5 / 24
This presentation
1 Motivation
2 Conceptual considerations
3 Empirical strategy
4 Data
5 Results
Financial constraints in Egypt 24 October 2018 6 / 24
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.
Financial constraints in Egypt 24 October 2018 7 / 24
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
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Private sector credit in Egypt: from bad to worse
Figure: The government crowding outthe private sector
Figure: Public debt was partly monetized
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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.
Financial constraints in Egypt 24 October 2018 10 / 24
Outline
1 Motivation
2 Conceptual considerations
3 Empirical strategy
4 Data
5 Results
Financial constraints in Egypt 24 October 2018 11 / 24
Financial inclusion
To examine financial inclusion we estimate the following regression: