The impact of access to finance in performance of formal and informal SMEs: Evidence from Kosovo

It is commonly acknowledged fact that access to finance has a large impact on the firms’ performance. On the other hand, the overall macroeconomic legal, regulatory and financial framework is assumed to be a critical determinant of firms’ access to finance. Firms in countries with higher levels of institutional development report lower financing obstacles than firms in countries with less developed institutions. Due to the information asymmetries, SMEs are more likely to be charged relatively high interest rates and asked for higher collateral and loan guarantees. Moreover, informal firms have significant gaps in information, credibility and skills needed to access external finance and they report higher obstacles than formal firms. The empirical evidence shows that use of loans and bank accounts for business by informal firms is very low and a significant majority of firms finance their day-to-day operations and investments through sources other than financial institutions such as: internal funds, moneylenders, family and friends. In this context, Kosovo represents an interesting example, where studying the impact of access to finance on businesses in both formal and informal sector represents a challenging task. Namely, during the past two decades Kosovo has been undergoing through transitional process which is characterized by dynamic and unstable business environment including large share of informal economy. Having in mind the above considerations, the aim of this paper is to assess the access to finance as a determinant of SMEs performance in Kosovo by paying attention to the differences between formal and informal businesses. For this purpose we use results from a survey on 1.250 SMEs. The analysis will include calculating the common summary statistics and drawing statistical inference based on standard hypotheses testing. Finally, we will provide some policy recommendations aiming to reduce barriers encountered by SMEs while accessing external finance.