Credit Constraints and ProductiveEntrepreneurship in Africa

Limited access of entrepreneurs to credit constrains the creation and growth of private firms.In Africa, access to credit is particularly limited for small and medium enterprises (SMEs) dueto unclear property rights and the lack of assets that can be used as collateral. This paperpresents a model where firm creation and growth hinge on matching potential entrepreneurswith productive technologies, while firm growth depends on acquired capital. The shortage ofcollateral creates a binding credit constraint on borrowing by SMEs and hence private sectorgrowth and employment, even though the banking sectors have ample liquidity, as is thecase in many African countries. The model is tested using a sample of 20 African countriesover the period 2005-09. The empirical results suggest that policies aimed at easing thebinding credit constraints (e.g., the depth of credit information and the strength of legal rightspertaining to collateral and bankruptcy) would stimulate productive entrepreneurship andprivate sector employment in Africa....