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Abstract

Trade credit is a form of short-term financing employed by non-financial firms in inter-firm trade. This study examines the incidence and the motives for extending trade credit among agro-food manufacturing firms in Africa. The study uses a subsample of agro-food firms from 2014 World Bank Enterprise Survey data from eight African countries: Burundi, Malawi, Mauritania, Namibia, Nigeria, Senegal, Sudan and South Sudan. The incidence of trade credit is relatively high among agro-food firms as 60.5% and 55% of firms extend and receive trade credit respectively. However, the mean proportion of yearly total input purchases received as trade credit (22%) is higher than the mean proportion of yearly total sales extended as trade credit (19%). From the two-limit Tobit estimation, firm size, manager experience, degree of product diversification, access to bank credit, overdraft availability and supplier credit are found to play a significant role in the level of trade credit firms extend to customers. However, when supplier credit is added to the model, it completely absorbs the effect of access to bank credit. For suspected endogeneity of supplier credit, an instrumental variable (IV) two-limit Tobit is estimated and the results show no presence of endogeneity. From the results, transaction, quality verification, marketing and long-term relationship motives for extending trade credit to customers are implied.

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