Trade Credit and Access to Finance: Evidence from Ethiopian Retailers

Using data on over 5,500 Ethiopian retailers, we document that there is lower use of trade credit in areas with more access to bank finance. Among firms within an area, although receiving trade credit increases the use of a bank loan by informal firms, it has no association with the use of bank loans for formal firms. This result suggests that financial relationships with other firms acts as a signal of creditworthiness for informal firms which are usually more credit constrained due to agency problems