Credit Financing and Performance of SMEs in Lira Municipality, Uganda

This study sought to examine the role of Credit financing on performance of SMEs in Lira Municipality. A sample of 120 respondents was considered with response rate of 100%. The findings indicated that extending credit to SMEs enables them to access essential resources, increase business diversification and increase productivity levels. The study recommends that Credit institutions should continue providing credit at affordable rates while endeavoring to train their clients on how to keep financial information, which is essential in assessing the borrower’s credit worthiness. SMEs should practice documenting their transactions, including information on personal characteristics, which are essential in assessing the credit worthiness of potential borrowers. Keywords: Credit Financing, Interest rates, Creditor information, Collateral security, Firm Performanc

Essays in applied macroeconomic theory: volatility, spreads, and unconventional monetary policy tools

This thesis contains three essays that employ macroeconomic theory to study the implications of volatility, financial frictions and reserve requirements. The first essay uses an imperfect information model where agents solve a signal extraction problem to study the effect of volatility on the economy. A real business cycle model where the agent faces imperfect information regarding productivity is used to address the question. The main finding is that the variance of the productivity process components has a small negative short run impact on the economy's real variables. However, imperfect information dampens the effects of volatility associated to permanent components of productivity and amplifies the effects of volatility associated to transitory components. The second essay presents a partial equilibrium characterization of the credit market in an economy with partial financial dollarization. Financial frictions (costly state verification and banking regulation restrictions), are introduced and their impact on lending and deposit interest rates denominated in domestic and foreign currency studied. The analysis shows that reserve requirements act as a tax that leads banks to decrease deposit rates, while the wedge between foreign and domestic currency lending rates is decreasing in exchange rate volatility and increasing in the degree of correlation between entrepreneurs' returns and the exchange rate. The third essay introduces an interbank market with two types of private banks and a central bank into a New-Keynesian DSGE model. The model is used to analyse the general equilibrium effects of changes to reserve requirements, while the central bank follows a Taylor rule to set the policy interest rate. The paper shows that changes to reserve requirements have similar effects to interest rate hikes and that both monetary policy tools can be used jointly in order to avoid big swings in the policy rate or a zero bound

Essays in Financial Economics and Applied Macroeconomics

This dissertation consists of three chapters that cover topics in finance and macroeconomics. Chapter 1 - Do Credit Booms Predict U.S. Recessions? This paper investigates the role of bank credit in predicting U.S. recessions since the 1960s in the context of a bivariate probit model. A set of results emerge. First, credit booms are shown to have strong positive effects in predicting declines in the business cycle at horizons ranging from six to nine months. Second, by isolating the effect of credit booms, I identify their contributions to recession probabilities which range between three and four percentage points at a horizon of six months. Third, the out-of-sample performance of the model is tested on the most recent credit-driven recession, the Great Recession of 2008. The model performs better than a more parsimonious version where we restrict the effect of credit booms on the business cycle in the system to be zero. Chapter 2 - Credit Fluctuations and Neglected Crash Risk in U.S. Bank Returns Using U.S. quarterly data from 1960, the paper studies the interaction between bank stock returns and aggregate credit fluctuations on a set of economic dimensions. I investigate the source of neglected crash risk in U.S. bank returns using a new deviation measure of aggregate loans per capita called ltd. A one standard deviation increase in ltd decreases bank stock returns by 5%, and their dividend growth by almost 6% over the following year. This variable embeds important information about both future returns (discount rate news) and cash flow growth (dividend news); yet a decomposition of future unexpected bank returns shows a higher incremental effect associated with the variance of news about the discount rate. The structure of the news is also highly dependent on the size of the financial institution with small commercial banks being more vulnerable than large ones to changes in the credit cycle. I interpret the size of neglected crash risk in the context of a regime-switching model where the outcome of a small probability of disaster can impact bank cash flows in either state exposing investors to an additional shock originating in the aggregate loan market. Chapter 3 - News shocks across countries: An empirical investigation We estimate the role of news shocks to total factor productivity, foreign interest rates and commodity terms of trade in explaining the variance of output and other macro aggregates in a large sample of countries. To correct for the small-sample bias of the variance decomposition estimates we develop a Bootstrap-after-Bootstrap method. We find that the mean difference of variance share of output explained by news shocks between developing and developed countries is: I) Negligible for news shocks to total factor productivity. II) Positive for news shocks to foreign interest rates (6 p.p.) and to commodity terms of trade (8.3 p.p.). Using cross-sectional data, we find that countries with less financial development have a larger share of output variance explained by news shocks to foreign interest rates, and countries with higher total trade of commodities to output ratio and less developed financial markets exhibit a larger share of output variance explained by news shocks to commodity terms of trade. These results suggest that to study the role of news shocks in the economy, one-sector models with only shocks to total factor productivity are not adequate, and that there must be a structural distinction regarding financial markets\u27 development when modeling developing countries as opposed to developed in a general equilibrium framework

The Impact of Credit Constraint on Exporting and Innovation: Evidence from Ghana and Vietnam

This work examines the impact of credit constraint on firms' exporting and innovation decisions. On the theoretical front, this chapter contributes by extending the Melitz's (2003) trade model of firms heterogeneous in productivity, which is devoid of financial factors, to include endogenous lending and borrowing decisions. This extension creates a framework upon which theoretical predictions about the impact of credit constraint on firms' exporting and innovation decisions can be made. I build a trade model that features (1) firms heterogeneous in productivity, liquidity, and collateral and (2) endogenous lending decisions with endogenous loan default and interest rate. Firms finance their fixed costs of exporting through internal financing from retained earnings and borrowing from banks. The model predicts that credit access has a positive impact on firms' export propensity, and that this effect is most pronounced for firms in the intermediate range of productivity. In the empirical application to a panel data set of Ghanaian firms between 1991 and 1997, I look at two types of access to bank credits: access to overdraft facilities and access to bank loans. My empirical estimation suggests that access to overdraft facilities increased firms' export propensity while access to bank loans had an insignificant impact on their export propensity. The effect of access to overdraft is strongest for firms in the intermediate range of productivity. I also build a theoretical model of innovation for firms heterogeneous in productivity under endogenous lending decisions. In this model, credit constraint arises from the asymmetric information problem, where banks cannot observe a firm's true productivity. The longer time frame and higher risks of innovating result in tighter credit constraints for innovating firms. Thus, the theoretical model predicts a positive relationship between a firm's interest payment per worker and its revenue (profits) per worker. The model also predicts that innovating firms face tighter credit constraint than firms do not innovate, which is shown by a positive, but smaller in magnitude, relationship between innovating firms' interest payment per worker and their revenues (profits) per worker. Empirical evidence from a sample of Vietnamese small and medium enterprises supports these theoretical predictions.Doctor of Philosoph

European macroeconomic imbalances at a sectorial level: Evidence from German and Spanish food industry

P u r p o s e: This research has analyzed the structural differences observed comparing medium size Spanish and German firms in the food industry, specifically biscuit production. A second objective has been to analyze if the different macroeconomic conditions in Spain and Germany have affected the performance of firms. Design/methodology: Using financial information from AMADEUS data base, a sample of firms (135 observations) in the food industry from Spain and Germany have been analyzed, considering the changes observed in the periods 2007-2009, 2010-2012 and 2013-2015. Productivity, real investment, cost per employee, profitability and interests paid by the firms are among the variables considered. The different hypotheses proposed have been tested using non-parametric test, mainly, Mann-Whitney test and Rho Spearman coefficient. Findings: Medium size German firms are bigger, using number of employees, than Spanish firms and show a higher profitability (using ROE) whatever the period consider. The evidence suggests that after a certain threshold size the correlation between size and productivity is negative. An interesting result is the negative correlation between interest rate and labour productivity; financial conditions can have a clear effect on firm’s performance. At this sector level there is no evidence of the process of internal devaluation, probably because the growth observed either by increase in real investment or sales have been accompanied by the need to hire skilled labour. Research limitations/implications: The main limitation is that this research has only focused on particular economic activity, biscuit producers, to include others firms in the food industry must be considered in future research. Practical implications: Size is a strategic decision that managers must face, to understand how labour productivity and financial performance is affected by size will help to take the optimum decision. The performance of the firm is also partially affected by the interest rate that the firm faces, the negative correlation found between interest rate and labour productivity is important in informing right decisions about increasing firm’s debt level. Social implications: Europe is rethinking industrial policy in the aftermath of the financial crisis (20082009) and in a global context with an increasing number of industrial activities locating in low labour costs destinations. Understanding the structural differences that industries across the European countries show is a key factor in deciding an efficient industrial policy. Originality/value: The last decade has accentuated the macroeconomic differences, in terms of long term interest rates or levels of unemployment between the core of Europe, Germany, and the periphery, including countries like Spain. This research is one the first ones in analyzing how these differences are affecting financial performance and structural differences in a particular industry, that is one of the most important exporters of the European Union.Peer Reviewe

Credit and inflation under borrower’s lack of commitment

Here we investigate the existence of credit in a cash-in-advance economy where there are complete markets but for the fact that agents cannot commit to repay their debts. Defectors are banned from the credit market but they can use money balances for saving purposes. Without uncertainty, deflation crowds out credit completely. The equilibrium allocation, however, is efficient if the government deflates at the time preference rate. Efficiency can also be restored with positive inflation. For any non negative inflation rate below the optimal level, the volume of credit and the real interest rate increase with inflation. Our results hold when idiosyncratic uncertainty is introduced and households are sufficiently impatient but in one instance: efficiency cannot be restored if the deflation rate is nearby the rate of time preference. Our numerical examples suggest that the optimal inflation rate is not too large for reasonable levels of patience and risk aversion. Finally, we present a framework where the use of money arises endogenously and show that it is tantamount to our cash-in-advance framework. Our results hold in this modified environment

Support for small businesses amid COVID‐19

How should the government support small and medium-sized enterprises amid a pandemic crisis while balancing the trade-off between short-run stabilization and long-run allocative efficiency? We develop a two-sector equilibrium model featuring small businesses with private information on their likely future success and a screening contract. Businesses in the sector adversely affected by a pandemic can apply for government loans to stay afloat. A pro-allocation government sets a harsh default sanction to deter entrepreneurs with poorer projects, thereby improving long-run productivity at the cost of persistent unemployment, whereas a pro-stabilization government sets a lenient default sanction. Interest rate effective lower bound leads to involuntary unemployment in the other open sector and shifts the optimal default sanction to a lenient stance. The rise in firm markups exerts the opposite effect. A high creative destruction wedge polarizes the government’s hawkish and dovish stances, and optimal default sanction is more lenient, exacerbating resource misallocation. The model illuminates how credit guarantees might be structured in future crises

The theoretical derivation of credit market segmentation as the result of a free market process

Information asymmetries make it difficult for banks to assess accurately whether specific entrepreneurs are able and/or willing to repay their loans. This leads to implicit interest rate ceilings, i.e. banks "refuse" to increase their interest rates beyond this ceiling as this would lower their net returns. Although the maximum interest rate increases as the size of enterprises decreases, such ceilings nonetheless constrain the banks’ ability to set interest rates at a level that would enable them to cover costs. If transaction costs are high, the total costs associated with granting small and medium-sized loans will exceed the maximum average return which the banks can earn by issuing such loans. For this reason, banks do not lend to small and medium-sized enterprises, and, as a consequence, these businesses have no access to formal sector loans. Because micro and small enterprises have a very high RoI, it is worthwhile for them to rely on expensive informal loans to finance their operations, at least until they reach a certain size. Once they have reached this size, however, it does not make economic sense for them to continue taking out informal credits, and thus they face a growth constraint imposed by the credit market. Medium-sized enterprises earn a lower RoI than small ones, which is why borrowing in the informal credit market is not a worthwhile option for them. Moreover, they do not have access to credit from formal financial institutions, and are thus excluded from obtaining any kind of financing in either of the two credit markets. As the result of free, unregulated market forces we get a stable equilibrium in which the credit market is segmented into an informal (small loan) segment, a formal (large loan) segment and, in between, a "non-market" (medium loan) segment

How Trade Credits Foster International Trade

Internationally active firms rely intensively on trade credits even though they are considered particularly expensive. This phenomenon has been little explored so far. Our theoretical analysis shows that trade credits can alleviate financial constraints arising from asymmetric information because they serve as a quality signal and reduce the uncertainty related to international transactions. We use unique survey data on German enterprises to test the effect of the use of trade credits on firms' exporting and importing behavior, both at the extensive and intensive margins. Our results support the assertion that trade credits have a positive impact on firms' exporting and importing activities