Does Access to Credit Enable Microenterprises Escape the Poverty Traps? Evidence from West Africa

Abstract

This study investigates how access to credit helps microenterprises in
West Africa escape poverty traps. It focuses on firms that report access
to credit versus those that view it as a constraint. Using semi-
parametric, parametric, and non-parametric techniques, the study
analyses World Bank Enterprise Survey data to measure the
relationship between profits (log of profits) and various factors. The
key objective is to determine if credit accessibility and marginal
returns to capital help microenterprises to escape poverty. Results
show that at low levels of physical capital (10-15%), marginal returns
to capital are minimal, especially for firms with financial barriers,
suggesting a non-convexity in production technology. The study
recommends formalizing microenterprises and promoting their access
to formal credit through strengthened financial systems and
cooperative credit schemes. Governments in West Africa are urged to
develop inclusive financial systems with affordable credit programs to
help microenterprises break free from poverty traps.