Credit Constraints and Productive Entrepreneurship in Africa

This paper explores how limited access of entrepreneurs to credit constrains the creation of new private firms as well as growth of the existing ones in developing countries world-wide. This paper presents a model where firm creation and growth hinge on matching searching entrepreneurs with technologies and on acquired capital. The shortage of collateral creates a binding credit constraint on SMEs borrowing and hence private sector development, even though the banking sectors have ample liquidity, as is the case in many SSA countries. Empirical testing of the model shows that policies aimed at easing the binding credit constraints (e.g., the depth of credit information and the strength of legal rights pertaining to collateral and bankruptcy) would stimulate productive entrepreneurship in Africa.