Firm credit and financial development: Evidence from the management practices across the universe of Ethiopian bank branches

The availability of firm credit is key for the entry, growth and internationalisation of firms. This project explores a new dimension behind firm credit, given by the capacity of banks to reach the best entrepreneurs across different geographic locations. Our approach focuses on bank branches as the units that engage with the local economy, given the importance of bank-borrower relations in reducing information asymmetries.

This topic is very relevant in Ethiopia, in which the local financial sector faces a growing demand for firm credit from across multiple geographic destinations, with limited possibilities to branch due to severe infrastructure constraints. This research will permit to shed light on this new channel, which may have potentially important policy implications for firm credit. For example, in terms of labour markets, enhancing bank investment in training better branch managers may not only have private gains for banks, but also a positive externality on the local economy (through the selection and retention of better managers). In terms of central banking, our project may inform central banks on how to regulate banks: allowing banks to be free in shaping their internal organisation and management of employees; also promoting local bank competition seems to be another driver behind bank performance and credit provision.

This study builds on literature, which measures the quality of firm management, initiated by the ground-breaking work of Nick Bloom and John Van Reenen (2007, 2010). We will replicate their methodology by conducting a series of telephone surveys, adopting an established methodology to evaluate the quality of bank branching. This information will then be evaluated together with indicators of local financial development at branch level (number of bank loans, loan sizes, deposit collected etc) and this will also be compared with the local level measure of firm investment (using the national census of medium and large enterprises).

Outputs

  • Publication - Policy Brief

    Management practices and banking: The case of Ethiopia

    This study investigates whether management practices allow Ethiopian bank branches to improve their credit provision. Researchers surveyed over 1,900 branches affiliated with 16 Ethiopian banks to score management practices across various dimensions and collect information on day-to-day operations. Ethiopian bank branches that adopt stronger management practices...

    12 May 2021 | Francesco Strobbe, Nicola Limodio

  • Publication - Working Paper

    Branch management and firm credit: Evidence from Ethiopia

    In order to understand the functioning of banks and firm credit in low-income countries, we collect novel datasets on the management practices and credit conditions from the universe of bank branches in Ethiopia. Our preliminary findings indicate that branches with strong practices operate over longer geographic distances and supply more local credit. We also observe that...

    1 Jun 2021 | Nicola Gennaioli, Nicola Limodio, Francesco Strobbe