Ethnic Ties and the Provision of Credit: Relationship-Level Evidence from African Firms

Abstract

This paper studies the effect of ethnic ties on trade credit provision. Previous work in Africa has found that entrepreneurs of Asian and European descent are more likely to obtain credit from their suppliers. However, since these analyses use firm-level data, one cannot distinguish the effect of community ties from that of unobserved firm quality that is correlated with the owner's ethnic background. Using data on specific supplier relationships of African firms, this paper more directly examines the effect of ethnic ties on trade credit provision. Results from random and fixed-effects models indicate that firms are twice as likely to obtain credit from suppliers from within the owners' ethnic communities as from outsiders, suggestive of a very strong effect of communal ties. However, these ties accounts for only a small proportion (15 percent) of the overall preferential credit access enjoyed by entrepreneurs of non-African descent.