Boosting youth entrepreneurship through informal credit in Benin

29 July 2020

Entrepreneurship is an important driver of economic growth and innovation in developing countries. In particular, small and medium-sized enterprises (SMEs) are labour intensive, have a huge potential for job creation and thus can contribute to tackling the current youth employment crisis.

The COVID-19 pandemic has significantly affected youth-owned enterprises in Benin. Decreasing revenue from sales puts young entrepreneurs’ business sustainability and livelihoods at risk. Young entrepreneurs may struggle to generate enough resources for their family needs or for credit repayments. Entrepreneurs may have to use their business capital for their family needs. In the context of COVID-19, access to credit is thus more important than ever.

Despite the high self-employment rate, youth entrepreneurs face important limitations to grow and sustain their businesses. Lack of funds and barriers to access credit to start or grow a business is one of the main obstacles for Benin’s young entrepreneurs. Consequently, over 60 per cent of young entrepreneurs rely on personal funds or money from friends and family (INSAE, 2014; ILO, 2018).

Precisely, the need to present collateral to gain access to formal credit prevents many small firms from seeking and obtaining credit lines. Besides, the interest rates of formal credit institutions are high, which can discourage younger SMEs and start-ups. Moreover, youth entrepreneurs and start-ups might lack the skills to develop a consistent business plan that can convince formal microcredit institutions to give them credits. Those excluded from the formal credit market - such as SMEs unable to meet collateral requirements or located in rural areas, far from formal credit institutions – tend to rely on informal credit.

Contrary to formal credit, informal and family credit sources are more flexible in terms of access and repayments. The cost of such credit is usually significantly lower than credit from formal sources, and therefore younger SMEs and start-ups might initially prefer informal sources of credit to procure basic production technologies or rent a land. However, as firms and their demands for credit grow, young entrepreneurs’ preference may change towards formal sources.

To stimulate youth entrepreneurship the Government of Benin established the Microcredit Program for the Poorest (MCPP) and the National Fund for the Promotion of Youth Entrepreneurship and Employment (FNPEEJ) in 2007. However, access to formal finance remains low across the country and not accessible to everyone.

A typical example of informal credit in Benin is the “tontine” mutual credit scheme. This type of scheme is widespread and allows SMEs to obtain credit at zero interest rate across the county. The mutual credit consists of savings and credit schemes over a given cycle. Each cycle can last one to two years, and where individuals form groups by affinity (family or friends) to save at given frequencies (weekly or monthly, etc.) and at each due date this saving is given to an individual who can use it to finance economic activity. This is repeated at each due date till the end of the cycle.   

To understand better how informal credit schemes, work in practice, we analysed a World Bank survey data on 4,374 small and medium enterprises owned by youth (aged 18-35) in Cotonou, Benin. We find that the low cost of family credit helps youth start businesses. However, as the firms grow, they rely more on formal credit. The findings also show that informal credit sources have an important impact on business performance, especially for small-scale enterprises that may not have whistling collateral to seek formal credit. In addition, women’s access to informal credit tends to have a more significant impact on their business performance compared to men, particularly for low levels of sales.

These findings highlight that policies that aim to encourage youth entrepreneurship should include measures to promote credit access from informal as well as formal sources. In particular, the mutual credit sector (such as “tontine”) should be recognized, regulated and better organized to facilitate easy access to credit. In the context of COVID-19 some countries, like Ghana, decided to design special bailout programs for SMEs in general and particularly youth SMEs. These programs may include low-interest credits, training programs on post-pandemic business growth strategies, etc. Beyond improving credit access, ensuring that SMEs, and in particular youth-owned enterprises, are resilient to shocks will be a step in the right direction.


 Abdelkrim Araar

Université Laval, Québec, Canada

Gbetoton Nadege Djossou

National School of Statistics, Planning and Demography

University of Parakou, Benin

Jacob Novignon

Department of Economics, Kwame Nkrumah

University of Science and Technology, Kumasi-Ghana

Year of publication

29 July 2020