The Nexus Between Informal Credit and Informal Labor for Micro and Small Enterprises in Egypt: Sources of Finance and Enterprises Informality: Evidence from MSE Surveys in Two Governorates

As a result of the economic meltdown in 2008, the hardest hit sector of the economy was the micro and small enterprises (MSE’s) sector. MSEs’ access to formal finance has been facing increasing restrictions, due to the adoption of more cautious lending strategies by both public and private banks. Hence, MSEs in Egypt still heavily rely on informal credit to finance their operations. This paper identifies the linkages between different sources of finance and their impact on informality of MSEs based on small scale surveys on credit and labor use in household businesses in villages in two governorates in Egypt. Preliminary analysis of this new data confirms that relying on self-finance is associated with increased informality of the surveyed enterprises in both governorate subsamples, whereas access to formal loans is associated with formalization through enterprise registration in non-agricultural enterprises surveyed in one of the governorates. These results provide preliminary evidence that policies that enhance access to formal credit and attempts to formalize informal sources of credit, such as RoSCAs, are likely to impact MSE’s formalization positively in Egypt.