Cultural fractionalization and informal finance: evidence from Indian firms

Khondker Aktaruzzaman () and Omar Farooq ()
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Khondker Aktaruzzaman: Xiamen University Malaysia
Omar Farooq: ADA University

Eurasian Economic Review, 2020, vol. 10, issue 4, No 5, 679 pages

Abstract: Abstract This paper is an attempt to document the impact of fractionalization on the demand of informal finance in India. Using the data provided by the World Bank’s Enterprise Survey, we show that firms headquartered in states/provinces with higher degree of fractionalization are more likely to use informal finance (such as the financing from trade creditors, moneylenders, and friends) than firms headquartered in states/provinces with lower degree of fractionalization. Our results are robust across various proxies of informal finance and various sub-samples. We also report that the effect of fractionalization on the use of informal finance is weaker where state-level or firm-level governance environment is strong. We also show that (when it comes to the use of formal finance) fractionalization is associated with higher use of retained earnings and lower use of funds provided by the banks.

Keywords: Informal finance; Religious fractionalization; SMEs; Enterprise surveys; Emerging markets (search for similar items in EconPapers)
JEL-codes: E26 G10 O16 O17 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s40822-020-00149-y

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