use regression coefficients to estimate the effect of offering formal or informal loans to the average individual or enterprise assuming that they are credit constrained. We evaluate the partial derivatives at the mean values of all variables but the FINANCE variables and present the results in Table 10. Table 10 illustrates that excluding microentrepreneurs, the estimated effect of removing credit constraints on the incidence of investment is slightly higher for formal loans than for informal loans. Furthermore, the estimated impact is higher for individual entrepreneurs than for enterprises. Regarding the I/K ratio, offering formal or informal loans would result in a small increase. Had there been no credit constraints during the period covered by the surveys, the percentage of microentrepreneurs and farmers making investments would have been about 31 and 35 percent higher, respectively. The estimated effects on the I/K are smaller: 10 percent for microentrepreneurs and about 8 percent for farmers. In the case of enterprises, the estimated effects are more modest as the incidence of credit constraints is lower than for individual entrepreneurs. Removing credit constraints for enterprises would result in 3-9 percent increase in the number of enterprises investing and in 4-19 percent higher I/K ratio.

# **8. Concluding remarks**

In this paper, we provide new evidence about the extent of credit constraints and whether credit constraints affect investment decisions. We find that the low participation rates in loan markets are partially attributed to a weak demand for loans. The empirical findings of the survey data dispute the commonly held belief that low participation rates in loan markets result from an insufficient supply of loans. About 53 percent of microentrepreneurs, 57 percent of farmers, 49 percent of nonagricultural enterprises, and 61 percent of agricultural enterprises present a self-reported demand for loans. The proportion of agents demanding formal loans is higher than the fraction demanding informal loans for all but microentrepreneurs.

Nevertheless, the incidence of credit constraints is pervasive across Mexico, especially among individual entrepreneurs. We find that about 37 percent of microentrepreneurs, 41 percent of farmers, 19 percent of nonagricultural enterprises, and 21 percent of agricultural enterprises are credit constrained from both formal and informal lenders. The incidence of credit constraints is higher for formal lenders than for informal lenders among individual entrepreneurs. In contrast, for enterprises, the degree of credit constraints is slightly higher for informal than for formal lenders.<sup>33</sup> Credit-constrained agents have an unmet demand for loans because the loan contracts offered by formal and informal lenders do not match their needs and because of self-selection out of credit markets because of the process involved in obtaining loans.

We find that the market penetration of formal and informal lenders in loan markets is in a dire state, especially for farmers and microentrepreneurs. For example, private banks reach about 2 percent of individual entrepreneurs demanding bank loans and 44 percent of nonagricultural enterprises and 46 percent of agricultural ones. Compared to private banks, the outreach of development banks is a bit higher for farmers (4 percent) but substantially higher for enterprises (11 percent). Unregulated nonbank intermediaries reach about 6-8 percent of individual entrepreneurs with a demand for loans.

Individual entrepreneurs receiving informal loans present the following features. Individual entrepreneurs receiving informal loans have previous experience as salaried workers, do not have formal savings, have trade credit transactions, sell their goods on credit, and reside in the South & Southeast and Center-west

> 33 In the case of registered enterprises the category of informal lenders includes mainly partners and shareholders.

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