Financial Informality among formal firms: Evidence from small businesses in Egypt

17 March 2021

Frank Betz, Farshad R. Ravasan, Christoph T. Weiss
View Journal Article / Working Paper

We explore structural and cyclical determinants of financial informality among formal firms in Egypt. Using panel data, we find that firms that started operating in the informal sector before registering are less likely to engage with the banking system. But firms with more educated and more experienced managers are more likely to open a checking account, often a prerequisite to obtain external finance. Exploiting data on the location of firms and bank branches, we show that firms located close to banks that invest more heavily in government debt are more likely to be discouraged from applying for a bank loan due to crowding out of the private sector.