Collateral Reforms and Access to Finance: Evidence from the West Bank and Gaza and Their Firms

Abstract

Abstract This paper examines the impact of an important financial reform, namely a collateral reform extending the assets, which could qualify as collateral for bank loans to the firms’ own equipment and moveable assets, so as to increase the access to such credit by small private firms. The reform studied was undertaken in the Palestinian territories of West Bank and Gaza (WBG) in the Middle East and North Africa (MENA) region where bank credit and financial markets have been especially heavily constrained. First, we apply two different synthetic control techniques to panel data covering both pre- and postreform years from both the WBG and a sample of comparable countries that did not undertake collateral reform. The results from both synthetic control methods show that such credit increased significantly after the reform in WBG but not in the nonreformed comparator countries. Then, we use comparable firm-level data obtained from a panel of all available firms in WBG from the Enterprise Survey of the World Bank, both 3 years before and 3 years after the reform to trace the impacts of the reform on various financial and other outcomes at the firm level. Despite the other difficulties that WBG was going through over the period, we find considerable evidence at the firm level that this collateral reform has been effective in stimulating credit, investment, and employment growth, especially among small firms, underscoring its potential for use by other low- and middle-income countries.