The effect of blending formal and informal finance on firm performance

Purpose The study examines the impact of blended finance, combining formal and informal sources, on the performance of South African informal firms, providing evidence on how this approach affects profitability, firm registration, size and growth dynamics. Design/methodology/approach This study adopts panel data from 1,500 South African informal firms, collected over 12 months, to assess the impact of blended finance on firm performance. A random effects model is employed to analyse the relationship, controlling for firm size, registration status and owner characteristics, with robustness checks via GMM estimation to address potential endogeneity issues. Findings The findings indicate a significant positive effect of blended finance on informal firm performance, with firms using both formal and informal finance experiencing a 20% increase in profitability. However, the effect varies by firm characteristics: smaller firms benefit most, while the impact diminishes with firm size and age. Formally registered firms with greater access to formal finance and mature firms show a reduced benefit from co-funding, suggesting that blended finance is particularly advantageous for smaller, less formally integrated firms. These results highlight the importance of informal finance in overcoming credit constraints for micro and small enterprises. Research limitations/implications The study's scope is limited to South African informal firms, which may affect generalizability. Further, the 12-month data span restricts assessment of long-term impacts. Results imply policy should support informal finance frameworks to aid small firm growth. Practical implications The study suggests that integrating informal finance into formal financial frameworks can enhance small firm performance. Policymakers should consider blended finance models to address credit gaps, especially for unregistered or micro businesses facing formal finance access barriers. Social implications Blended finance can promote economic inclusion by enabling underserved small businesses to access funding, fostering local entrepreneurship, job creation and poverty reduction. Supporting informal finance channels empowers micro-entrepreneurs and strengthens community-based economic resilience. Originality/value This study provides novel insights into the underexplored impact of blended finance on informal African firms. While revealing benefits, it critically questions the sustainability of reliance on informal finance and underscores the limitations of formal finance in reaching marginalized firms effectively.