Browsing by Author "Graham, Michael"

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    Substitution or complementarity? exploring trade credit use in African manufacturing MSEs
    (Routledge, 2025) Tita, Anthanasius Fomum; Gbahabo, Paul Terna; Graham, Michael
    African manufacturing micro and small-sized enterprises (MSEs) depend heavily on supplier (trade) credit because formal bank finance is limited. Analyzing a dataset of around 10,846 firms across 45 African countries with an IV-probit approach, we find a large significant negative relationship between bank credit and trade credit, confirming that firms treat the two sources as substitutes. The substitution effect is strongest among credit-constrained MSEs and among mature firms (estimated coefficient ≈ –1.1), whereas very young start-ups show no significant effect. These patterns show how financing gaps and information asymmetries steer established MSEs toward supplier credit to fund working capital. Our study provides one of the most extensive multi-country pieces of evidence to date on trade-credit substitution in African manufacturing, our study points to several potential policy actions: expand credit registries to include inter-firm credit histories, scale supplier-finance tools such as factoring and reverse factoring, and provide prudential incentives, like lower capital requirements on receivables-backed loans. Such measures can help shift informal trade credit into the formal financial system and improve access to finance for constrained firms. These mechanisms should be designed to absorb a portion of the credit risk borne by lenders, thereby incentivizing increased lending to manufacturing MSEs.