What Prevents Firms from Access to Finance? A Case Study of OIC Countries

1. IntroductionAn empirical study conducted by Ayyagari, Demirguc-Kunt, and Maksimovic (2008) has found that only obstacles related to finance, crime, and political stability are linked directly to the level of growth of firms. Further sensitivity tests used by the authors have revealed that access to finance is the only significant factor affecting the performance of firms. At a macro level, a number of other theoretical and empirical findings within the literature confirm the importance of financial inclusion for long-term economic development. Countries with better financial inclusion grow faster, resulting in lower levels of income inequality and the incidence of poverty. According to Beck, DemirgucKunt, and Levine (2007), almost 30 percent of the cross-country variation in changing poverty rates can be explained by variation in financial development.Furthermore, access to finance remains a key constraint to the growth of the private sector, especially in developing and least developed countries (LDC). The World Bank (2004) indicates a high degree of severity with regard to the financial obstacles faced by poor countries. Lack of Access to finance is disproportionally present for firms in LDCs, with 41 percent of Small and Medium Enterprises (SMEs) in LDCs reporting access to finance as one of the major constraints to their growth and development, as opposed to 30 percent of firms in middle-income countries. The same figure stands at only 15 percent in high-income countries (IFC, 2011). Some empirical studies which suggest positive effects with respect to financial inclusion on firms' growth include those conducted by Demirguc-Kunt and Maksimovic (1998) and Rajan and Zingales (1998). In this paper, a firm-level data survey is used to focus on the following questions. First, what are the firm-level and country-specific predictors of financing obstacles in the Organization of Islamic Conference (OIC) countries? Second, how similar are those determinants among the LDCs versus those of the developing countries within the OIC.The current paper contributes to the existing discussion on financing obstacles in several ways. First, in contrast to previous studies which have focused primarily on all developing countries, the present study focuses on a sub-set of these countries that belongs to a particular grouping, namely, the Islamic countries. This group of countries has a significant share of the population within the developing world and also has its own specificities. For example, 57 member countries of the OIC account for 22.5 percent of the world's population, 7.2 percent of the world's total output, and 25 percent of the global land area (SESRIC, 2011). Nevertheless, the average labor force participation rate in OIC countries is lower than the world average. Only 30 percent of the population in OIC countries had access to financial services in the mid 2000s. This is in contrast with 41 percent in non-OIC developing countries, and 90 percent in developed countries.Second, the study utilizes a unique firm-level data base which contains responses collected from 13,300 firms. More importantly, the sample selected contains a very high proportion of private firms.Third, the model uses is a binary probit regression that is estimated for both the least developed and developing OIC countries, and assumes that the determinants of financing obstacles are different for both categories. The present study departs from the existing studies in that the variables with respect to financing obstacles are not homogenous across LDCs and developing OIC countries.The results suggest that the firm-level characteristics tend to be more diverse and statistically significant in the OIC LDCs when compared with those of the developing countries. For example, older, larger, manufacturing-focused, externally audited and foreign-owned firms report less financing obstacles in LDCs when compared with other OIC countries. …