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).