Limited access to credit and informal modes of operation are two common characteristics of Micro and Small Enterprises (MSEs). We investigate the impact on relying on informal credit in enhancing the probability of informality of MSEs. Formality is assessed through tax registration, operation license and industrial or commercial registration. We measure the relationship between the sources of informal finance and informality by using logistic regression models to estimate the effect of different types of variables on informality. We use data from a field survey conducted in 2016 in two rural governorates in Egypt to investigate the determinants of informality. Results indicate that informal credit such as personal finance and ROSCA’s are strongly associated with a firm’s informal form of operation. A firm’s characteristics such as its current capital have a strong positive association with formalization. Moreover, a statistically significant relationship exists between a firm’s informality and the educational attainment of its owner and workforce.

Research Fellows
Mohamed EL-Komi
Tenured Associate Professor of Economics, American University...

Authors
Pansye ElKashef
Research Manager, BEDMLab (Behavioral and Economic Decision-Making...