Demand for and Supply of Trade Credit in Africa

Abstract

With African firms highly rationed out of credit markets, trade credit has become an important source of financing. Yet, not much is known about the drivers of trade credit demand and supply in the continent. This study fills this research gap by estimating trade credit demand and supply for a panel of listed firms in 19 African countries over a period of 29 years. Using dynamic and static structural equation modelling, the study finds short-term leverage, firm size and past experience in trade credit as simultaneous determinants of trade credit demand and supply. The study further finds turnover (inverse relationship) as the unique determinant of trade credit supply, and cash flows (inverse effect), raw material inventories (inverse effect) and investment in current assets (positive effect) as the peculiar determinants of trade credit demand. These determinants are robust to the control for endogeneity and non-separability, and to the inclusion of lagged value of the dependent variables, industrial classification and time dummies. These findings have important implications for trade credit policy in Africa.