Credit Extension Research Articles

From carry trades to trade credit: Financial intermediation by non-financial corporations

We use detailed firm-level data from Mexico to document that non-financial corporations engage in carry trades by borrowing in foreign currency (FX) and lending in domestic currency, largely in the form of trade credit, accumulating currency risk in the process. Firms are more active in carry-trades when FX borrowing is relatively cheaper and build currency risk by accumulating peso assets. We use the 2009 Mexican peso depreciation to show that firms that were more active in carry trades experienced larger reductions in investment. Nevertheless, their extension of trade credit remained stable, insulating their trading partners from their balance sheet exposure to the shock.

Firm-level political risk and the firm’s trade credit extension

This paper investigates the influence of firm-level political risk on the firm’s supply of trade credit. Using a novel measure of firm-level political risk developed by Hassan et al. (2019), we find that firm-level political risk has a positive impact on the firm’s trade credit extension. We also demonstrate that our results are not driven by macro financial and political events, firm-level political sentiment and non-political risks, and macro-level economic and political factors. Our result continues to hold after addressing the potential endogeneity concern. Additionally, we find that the positive impact of political risk on trade credit extension is more pronounced for firms selling differentiated goods and services. Furthermore, we demonstrate that extending trade credit enhances firm value when a firm faces higher political risk. This paper highlights the importance of considering firm-level heterogeneity in political risk. It also contributes to the literature on the determinants of trade credit extension and deepens our understanding of the relationship between political risk, trade credit, and corporate performance.

The Implications of the Countercyclical COVID-19 Policy on the Performance of Rural Banks and Sharia Rural Banks in Indonesia

This study investigated the impact of the Indonesian government policies implemented through POJK No. 11/POJK.03/2020 on the banking performance of Rural Bank (BPR) and Sharia Rural Bank (BPRS) after the implementation of countercyclical policies to stimulate the country's economy affected by the COVID-19 pandemic in Indonesia between March and December 2020. Mixed method approaches were applied to analyze the contributing factors to different performances between seven Rural Banks and seven Sharia Rural Banks in West Sumatra that were randomly selected through purposive sampling based on proportionate assets. The quantitative data were financial statements sourced from the OJK 2021 Publications, and the qualitative data were collected from in-depth interviews with eight Directors of Rural Banks and Sharia Rural Banks selected from the snowball sampling. Analyzing Indonesian government policies embodied in the countercyclical policy, we found that banking policies in Sharia Rural Banks outperformed those of conventional Rural Banks, as reflected by the average ROA (1.16% vs 1.33%), ROE (0.09% vs. 0.08%), and NPL (6.67% vs. 6.82%). The contributing factor to this gap was the different internal policies of each institution to translate the countercyclical concept based on the operational principles, such as the interest rate of Rural Bank and margin of Sharia Rural Bank despite the fact that both banks shared practice in the principal deferment and credit extension.

Trade credit and the stability of supply chains

We show that trade credit flows increase when a firm in a production network becomes a less reliable supplier due to an operating shock. Affected firms extend more trade credit when their customers have lower switching costs or expect more disruption. Suppliers that are more dependent on the affected firms facilitate the trade credit extension. However, when financial constraints at the affected firms and their suppliers prevent the increase in trade credit, customers sever their relationships with the affected firms, and the sales of the affected firms and their suppliers drop, suggesting that trade credit enhances production network stability.

Presidential economic approval rating and trade credit

Trade credit has become crucial for businesses, financial institutions, and policymakers due to the significant role it plays in the economy and financial management. In this paper, we discuss how an important public opinion index, the Presidential Economic Approval Rating (PEAR), impacts a firm's decision to supply trade credit. We find convincing evidence that PEAR is positively correlated with trade credit extension. Furthermore, our results indicate that while business cycle and financial flexibility positively moderate the association between PEAR and trade credit, other factors like market concentration, CEO confidence, and oil supply shocks attenuate their link. Additionally, we observe that consumer sentiment mediates the relationship between PEAR and trade credit. Finally, our findings remain statistically unchanged when we conduct a series of robustness tests using alternative measures and the system generalized method of moments (GMM) technique. In summary, our study provides valuable insights into the considerable influence the general public's perception of the way the President is handling the economy has on corporate decision-making and contributes to the emerging literature on the importance of trade credit.

Credit access and housing insecurity: Evidence from winter utility shutoff protections

Fifty-six percent of urban renters face some level of housing insecurity. I explore the role of credit access, or lack thereof, as a contributing factor. To do so, I study a temporary line of credit extended to households in the form of protection from heat shutoffs during the winter. These protections allow households to delay winter energy payments without risk of losing their heat. I adopt a triple difference-in-differences (DDD) approach, leveraging variation in states’ shutoff protection dates and census tracts’ average energy burdens. I estimate that the temporary extension of credit reduces the eviction filing rate by 4% in census tracts with high energy burdens. I provide suggestive evidence that eviction filings do not spike after the temporary credit access ends, implying a net negative effect of temporary credit access on filings over the entire year. I further demonstrate that a 3% increase in rental payments explains the decline in eviction filings, which is consistent with access to credit allowing renters to smooth consumption.

Private Sector Investments: The Implication of Deposit Money Banks’ Credits in Nigeria

Reported in this article is the empirical effect of deposit money banks’ credits on Nigeria’s private sector’s investments. The study was evaluated empirically over a period of forty-one years, from 1981 to 2021. Deposit money banks’ credits is proxied by bank credits, with interest rate and money supply moderating regressors while private sector investments is measured as private investments. Utilized for analysis are sourced secondary data from the Central Bank of Nigeria statistical bulletin and the applied methods of analysis include descriptive statistic technique, Augmented Dickey-Fuller’s Unit Root test, Auto regressive Distributed Lag technique. The findings obtained showed clearly that private investments and banks’ credits were stable at levels, as cost of credit (interest rate) and money (liquidity) supply were stationary at first difference. In addition, banks’ credits had direct and significant effects on the regress and (private investments) in Nigeria, cost of credit had negative but significant bearing on private investments while money supply had positive and significant effects the independent variable. Lastly, there exists long-run equilibrium rapport among private investment, banks’ credits, interest (credit) rate and money supply at 5 percent critical level. Sequel to these findings, it is therefore concluded that deposit money banks’ credits had significant-positive effects on private sector investments in Nigeria in both short run and long run. It is thus, recommended among others that deposit money banks need encouragement to expand credit extensions to private sector operators for sustainable enhancement of investments in this sector of the economy.

Delayed crises and slow recoveries

We present a rational expectations model of credit-driven crises, providing a new perspective to explain why credit booms can lead to severe financial crises and aftermath slow economic recoveries. In our model economy, banks can operate in two types of business. They are sequentially aware of the deterioration of fundamentals of the speculative business and decide whether to continue credit extension in that business or liquidate capital and move into the traditional business. However, because individual banks face uncertainty about how many of their peers have been aware, they rationally choose to extend credit in the speculative business for a longer time than is socially optimal, leading to an over-delayed crisis and consequently more banks being caught by the crisis. This in turn renders the financial crisis more severe and the subsequent economic recovery slower. Extending to a standard textbook macroeconomic growth setting, our model also generates rich dynamics of economic booms, slowdowns, crashes, and recoveries.

The role of Fintech financing in correcting ecological problems caused by mineral resources: Testing the novel ecological deficit hypothesis

Mineral resource-abundant nations encounter different forms of ecological problems which necessitate these nations to come up with credible solutions. Hence, this study empirically explores how Fintech development affects the ecological statuses of leading mineral-exporting nations, in light of a novel ecological deficit hypothesis. In this regard, advanced panel data estimation methods that are adept in handling issues related to cross-sectional dependence, heterogeneous slope coefficients, and endogenous covariates are employed for analytical purposes. Overall, the findings obtained from the analysis highlight the importance of persistently scaling credit extensions to Fintech startup-based projects for ultimately shrinking the initial ecological deficit-widening impacts of Fintech development. Accordingly, the validity of the ecological deficit hypothesis is verified by the inverted U-shaped nexus between Fintech credits and ecological deficits. In addition, the mineral sector expansion-led deterioration in the ecological status is affirmed by the findings. Moreover, the pollution haven hypothesis in the context of ecological deficits is found to be valid while urbanization is observed to deteriorate the extent of ecological deficits in the selected mineral-exporting nations. Furthermore, the robustness of these findings is confirmed in most cases when ecological footprint and biocapacity are considered as the outcome variable instead of ecological deficits. In line with these key findings, it is deemed necessary for the concerned mineral-exporting nations to not only amplify their level of Fintech credit extensions but also increase its share of their respective national output levels. Besides, greening future mineral sector expansion-related policies is essential in further reducing the ecological deficits. Furthermore, attracting ecologically friendly foreign direct investments and adopting sustainable urbanization mechanisms should be considered by these mineral-exporting nations to become ecologically surplus in the future.

Commonality without convergence: An analytical framework Accounting for variegated financialisation in emerging economies

Financialisation is not a homogenous but a variegated process. However, the question along which categories this variegation happens is currently unanswered. We identify four variegation categories: financial sector structure, productive structures, the role of the state, and the growth model. We apply these categories to two seemingly similar emerging-economy contexts which have produced different financialisation experiences: Colombia and South Africa. Financialisation in South Africa is much more market-based, meaning it is led by the financial sector unfolding through financial markets and banks’ activities visible in their much larger size, activity, and international interconnectedness, than in Colombia. Hence, South African credit extension, bond markets, domestic pension funds, and stock market capitalisation are substantially larger than Colombia’s, while the Rand has experienced strong internationalisation since 2000. Nevertheless, there is evidence financialisation processes have been unfolding dynamically in both countries over the past two decades, reinforcing the view of variegated financialisation as a common tendency with significant heterogeneities across countries.

Trade credit provision and stock price crash risk

We investigate the influence of trade-credit provision on stock-price crash risk in an emerging-market setting. Using a sample of Chinese listed firms, we find that trade credit provision significantly increases stock-price crash risk. Results are economically significant and robust to different measures of crash risk, alternative trade-credit calculations, and multiple model specifications. We interpret our results that, in China, an emerging market with a less developed credit environment, trade credit provision increases stock-price crash risk particularly through an information channel, this link being heightened when firm information asymmetry is more severe. We contribute to the relatively little research on how extension of credit by firms impacts their financial stability. Findings should be of great interest to scholars interested in the role of information disclosure in emerging financial markets; as well as to investors and regulators concerned about stock-price crash risk.

Executives' horizon and trade credit

AbstractUsing executives' decision horizon as a measure of internal governance, this study examines the association between customer's internal governance and supplier's extension of trade credit. Suppliers may extend more trade credit to customers with strong internal governance because of their lower operational risk, higher firm performance, and better information environment. However, firms with better internal governance may have easier access to other sources of financing, and thus may need less trade credit. Using a sample of US listed firms between 1992 and 2021, we find that suppliers extend more trade credit to customers with strong internal governance. We also find that the association between internal governance and trade credit is more pronounced for financially, and informationally constrained firms. Our results are robust to alternative measures and specifications. Incremental to prior studies, we show that effectiveness of customers' internal governance affects suppliers' lending decisions.

Dynamics of Trade Credit, Bank Credit Extension, Sustainable Economic Growth, and Imports: Evidence from the European Non-Financial Sector

This study investigates the relationship between trade credit and sustainable economic growth, bank credit extension, and imports in the context of 15 European non-financial sectors spanning 2005Q1 to 2019Q2. Furthermore, it attempts to unveil the nonlinear relationship between trade and bank credit extension. To achieve these aims, balanced panel data are constructed and second-generation panel data are used to analyze Panel AMG Estimation, and an improved panel causality test for heterogeneous panels is employed. To enhance the robustness of the study, the results are scrutinized on a country-specific basis. The findings revealed a positive relationship between trade credit and both sustainable economic growth and imports, whereas a negative correlation was found with bank credit extension. These divergent outcomes at the country level were thoroughly discussed. Finally, a bilateral causality is identified between trade credit and economic growth, bank credit extension, and total manufacturing production, whereas a unidirectional causality is found with import activities.

Agricultural Cooperative and Rural Poverty Reduction among Members in Ekiti State, Nigeria

This study investigated the link between agricultural cooperative and rural poverty reduction among members in Ekiti State. Primary data from the 330 copies of the questionnaire were distributed to rural farmers in the study area. Data obtained were analyzed using descriptive statistics, spearman correlation and paired sample T-Test to test the formulated hypotheses of the study at the 5% level. Results from the data analyzed shows that the correlation matrix between the variables (cooperative marketing, cooperative credit extension and cooperative farm input supply) revealed positive coefficient values of 0.111, 0.151 and 0.372 respectively. The implication of this is that there exists a significant positive relationship between the dependent and independent variables in the study area. This also explains that cooperative marketing, cooperative credit extension and cooperative farm input supply will help in reducing poverty in the study area. The study recommended that government should improve on the road infrastructure in the rural areas to create easy transportation of agricultural produce to city centers to further enhance rural income, government and relevant agencies are advised to make prompt and low interest rate credit facility available for farm business and should provide farmers with the needed input to boost farm business which can aid employment creation and also provide the farmers with the technical know-how through trainings and seminars on the use of implements/inputs that can be helpful to their farming.

Robust Optimal Monetary Policy in a Forward Looking Structural Vector Autoregression Model for the Kingdom of Eswatini

The purpose of the study was to establish the optimal monetary policy to influence inflation, credit extension to the private sector, and real GDP in the right direction in the Kingdom of Eswatini. Based on the three estimated models of the Structural Vector Autoregressive (SVAR) using monthly data for the period 2000 to 2019, the results indicate that the discount rate is optimal/ superior over the reserve requirement and liquidity requirement. Monetary policy shocks to the reserve requirement and liquidity requirement are not effective to stimulate economic growth and bank credit to the private sector, which indicates that the three instruments do not complement each other. The results of the variance decomposition show that the discount rate’s contribution is 0.62% on real GDP, 3.25% on inflation, and 3.31% on bank credit in month twenty-four, which is significant. The study also recommends that the Central Bank of Eswatini should consider a policy mix of 5.60% for the discount rate, 4.30% for the reserve requirement, 13.29% for the liquidity requirement to influence inflation, bank credit to the private sector and economic growth in the right direction.

COVID-19 pandemic and corporate liquidity: The role of SOEs’ trade credit response

Although state-owned enterprises are associated with less efficiency and lead to resource misallocation, they may have stabilizing effect in face of a crisis. Exploiting the COVID-19 pandemic as a natural experiment, we study the role of firm ownership in trade credit provision and find robust evidence that SOEs increase their trade credit to downstream firms more than non-SOEs after the outbreak of the pandemic. Moreover, we explore the underlying mechanism and find that better financing ability and multitask of the SOEs contribute to greater trade credit during the pandemic, and the latter plays a more active role. Further analyses show that SOEs’ advantage in trade credit extension is more pronounced in industries with higher external financial dependence and provinces with a higher level of government involvement. Our paper provides new insights into the real effects of SOEs on the economy.

Data breaches (hacking) and trade credit

This study examines the relationship between data breaches (hacking) and trade credit for U.S. firms. Employing a staggered difference-in-differences approach, we observe that breached firms face shorter payable periods from suppliers than the control group. Data breaches increase the operational risk of breached firms. Suppliers associate high information risk with breached firms. Our findings remain robust to alternative specifications and are more pronounced for firms with no in-house IT expertise and an increased number of stolen records. Overall, our findings suggest that supplier firms become more prudent with the extension of trade credit after data breaches.

Account aggregator ecosystem: A step towards revolutionising digital lending in India

An essential contributor to a nation’s economic success is providing individuals with access to established financial systems. India, through innovative use of digital finance infrastructure, aka India Stack, provided as a public good, removes obstacles in offering financial products to the unbanked and underbanked. The three pillars of the India Stack are: the identity rail (Aadhaar), the payment rail (universal payment interface) and the data-sharing rail of account aggregators (AAs). The next phase in the India Stack is the Open Credit Enablement Network (OCEN), which promises to transform the digital lending industry by shifting the business model from asset-based to cash-flow-based lending. OCEN is a standard set of application programming interfaces (APIs) that pull data based on customer consent from financial information providers and offers it to financial information users to decide on credit requests. AA manages consent on behalf of the customer using data empowerment and protection architecture (DEPA). The rest of the paper explains the interoperability and portability features of the AA ecosystem, the pricing model that the AA can adopt for a sustainable business model, describes the current state of the AA ecosystem in terms of consents provided and fulfilled and concludes with the use cases of OCEN in credit extension and continuous loan monitoring.

Trade credit, creditor protection and banking crisis

This paper analyzes the effect of banking crises on the trade credit provided to customers and whether this effect depends on the strength of a country's legal protection of creditors. The results indicate that trade credit extensions increase in times of crisis, although this increase is smaller in countries where creditors are well protected; however, no differences are observed in trade credit extensions between countries with weak and strong creditor protection in non-crisis periods.

Bank credit, inflation, and default risks over an infinite horizon

The financial intermediation wedge of the banking sector used to co-move positively with the federal funds rate, but the post-GFC era saw a disconnect between them. We develop a flexible price dynamic general equilibrium with banks’ liquidity creation to offer an explanation. In a corridor system, the financial wedge and policy rate are shown to co-move, and the pass-through of monetary policy onto both inflation and output obtains. However, the post-GFC floor system obviates the need for the financial wedge to cover the cost of obtaining reserves, so the wedge and the policy rate indeed disconnect in equilibrium; furthermore, we show that the disconnect obstructs monetary expansions from generating inflation. In this environment, tightening bank capital requirement leads to disinflationary pressure. Money-financed fiscal expansions that subsidise non-bank sectors’ borrowing costs improve output and reduce default risks but increase inflation. The model uses banks’ liquidity creation via credit extension to provide a rationale for both the pre-pandemic disinflation and the post-pandemic inflation. The results hold both on the dynamic paths and in the steady state, and the role of money enlarges the Taylor rule determinacy region.