Banking Services Supply and Micro Firm Performance: Evidence from Colombia

This paper uses a dataset of a survey of Colombian micro firms from 2003 to 2007 in combination with data from publicly available sources about banking services supply at the municipality level, to assess the impact of the availability of banking services on micro firms performance. We find a positive and statistically significant correlation between banking services supply targeted to micro firms and firm size measured by sales, firm labor productivity and firm capital to labor ratios, and a nil correlation with employment, suggesting improved access to credit has resulted in micro firms’ transit to more capitalintensive technologies. This result is robust to alternative empirical specifications. Also, policies to extend microcredit access to the smaller informal micro firms appear to have been successful in promoting their growth. Finally, microcredit availability at the local level does not appear to have a positive impact on formalization. On the contrary, more flexible requirements to access financing, seem to be a counter incentive for formalization.