The informal sector forms a significant proportion of the private sector of many developing economies. Despite challenges in exact measurement of its size, the informal sector is noted for its role in employment creation as well as economic output in sub-Saharan Africa. However, access to formal credit is a major challenge for informal firms due to the nature of their operations. This leads many entrepreneurs in the informal sector to resort to informal credit. Using the World Bank’s Informal Enterprise Surveys, this study investigates the effect of type of finance on the performance informal firms. The results show that the use of informal finance is associated with lower performance, while formal finance is associated with better performance. This study recommends integrating community-based group lending schemes with credit information systems to make it easier to assess informal enterprises for access to credit.

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Keywords

Informal finance, Informal firms, Firm performance, Sub-Saharan Africa