We investigate the question of whether firms in Africa's manufacturing sector are credit constrained. The fact that few firms obtain credit is not sufficient to prove constraints, since certain firms may not have a demand for credit while others may be refused credit as part of profit maximising behaviour by banks. To investigate this question, we use direct evidence on whether firms had a demand of credit and whether their demand was satisfied in the formal credit market, based on panel data on firms in the manufacturing sector from six African countries. Of those firms with a demand for credit, only a quarter obtained a formal sector loan. Our analysis suggests that while banks allocate credit on the basis of expected profits, micro or small firms are much less likely to get a loan than large firms. We also find that outstanding debt is positively related with obtaining further lending. The role of outstanding debt is likely to be a reflection of inefficiency in credit markets, while the fact that size matters is consistent with a bias as well, although we cannot totally exclude that they reflect transactions costs on the part of banks. We present an analysis showing how much more profitable small firms must be to obtain a loan than large firms.
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