Trust in banks and borrower discouragement
Ali Recayi OGCEM
Málaga
6th July 2023
Co-authored with Ruth Tacneng and Amine Tarazi from Université de
Limoges–LAPE
Ali Recayi OGCEM (Málaga)
Trust in banks and borrower discouragement
6th July 2023
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Outline
General Context
Motivation
Contributions
Empirical Strategy
Data and Model Specification
Main Result
Model Specification
Result
Robustness Checks
Concluding Remarks
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Trust in banks and borrower discouragement
6th July 2023
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General Context: The Importance of Reliable Financing for
SMEs
- SMEs need access to stable funding for growth, expansion, and
innovation.
- Challenges faced include a lack of reliable financial history and
asymmetric information.
- Concerns about rejection, high cost of credit, and unfavorable conditions
discourage loan applications.
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Trust in banks and borrower discouragement
6th July 2023
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General Context: Understanding Borrower Discouragement
- Borrower discouragement is a self-rationing mechanism.
- High incidence of discouraged borrowers in developed and developing
countries.
- At least 40% of discouraged borrowers in the UK, Switzerland, and
Belgium would have likely obtained a loan if they had applied.
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Trust in banks and borrower discouragement
6th July 2023
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Motivation: Trust in Banks and its Impact
- Trust in financial institutions affects funding sustainability and
productivity.
- Distrust can discourage formal household saving behavior, impair bank
deposits, and affect the supply of loans.
- Lower trust may discourage firms from using formal credit.
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Trust in banks and borrower discouragement
6th July 2023
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Motivation: The Role of Interpersonal Trust
- Interpersonal trust influences a firm’s expectation of the cost of credit
and success of a potential loan application.
- It encourages a cooperative attitude and increases contracting efficiency.
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Trust in banks and borrower discouragement
6th July 2023
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Contributions
- Investigates the role of variations in trust in financial institutions.
- Explores the impact of culture or informal institutions on outcomes and
behavior.
- Addresses potential endogeneity issues using the instrumental variable
probit model.
- Offers insight into the complementary effects of trust in banks and
interpersonal trust.
Ali Recayi OGCEM (Málaga)
Trust in banks and borrower discouragement
6th July 2023
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Study Objectives
- Examine the influence of trust in banks on borrower discouragement.
- Analyze the role of interpersonal trust in the trust-discouragement link.
- Study the interaction of both forms of trust in influencing firm financing.
- Contribute to the understanding of how culture or informal institutions
affect firms’ credit constraints.
Ali Recayi OGCEM (Málaga)
Trust in banks and borrower discouragement
6th July 2023
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Empirical Strategy
- First, estimate the impact of trust on firms’ likelihood of being
discouraged.
- Second, test whether there are complementary effects of trust on
borrower discouragement.
- The paper also uses the Heckman Probit model to deal with plausible
sample selection problems.
Ali Recayi OGCEM (Málaga)
Trust in banks and borrower discouragement
6th July 2023
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Summary of Key Variables
Variable
BorrowerDiscouragement
TrustinBanks
InterpersonalTrust
Z
Industry dummies
Survey year dummies
NumSysBankCrisis
CreditConstrained
Ali Recayi OGCEM (Málaga)
Description
A dummy variable equal to one for
discouraged borrowers
The proportion of individuals in a
country who have confidence in banks
The proportion of individuals in a
country who indicate most people can
be trusted
A vector of firm-specific and countryspecific control variables
Based on the firm’s ISIC
To control for year-specific effects
The number of banking crises experienced by a country since 1970
A dummy variable indicating if the
firm applied for a loan
Trust in banks and borrower discouragement
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Model Specification
Pr(BorrowerDiscouragement = 1) =Φ[β0 + β1 TrustinBanksj +
β2 InterpersonalTrustj +
Z + SurveyYeart +
Sectork ]
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Trust in banks and borrower discouragement
6th July 2023
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Result – Does trust in banks matter in reducing borrower
discouragement?
Pr (BorrowerDiscouragement=1)
TrustinBanks
InterpersonalTrust
TrustinBanks*InterpersonalTrust
Probit
IV-Probit
1.636***
8.416***
-15.52***
0.870
9.554***
-14.88***
Table: The impact of trust in banks on borrower discouragement, 2015-2019
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Trust in banks and borrower discouragement
6th July 2023
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Result - Transmission channel
Pr (BorrowerDiscouragement=1)
TrustinBanks
InterpersonalTrust
(i) Probit
(ii) IV-Probit
-0.3546***
-0.7468***
-1.2130***
0.4973
Table: Marginal effects of TrustinBanks and InterpersonalTrust on the probability
of borrower discouragement, excluding firms that do not rely on banks to finance
their working capital operations
Ali Recayi OGCEM (Málaga)
Trust in banks and borrower discouragement
6th July 2023
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Result - Marginal probability effects
Percentile Levels
P10
P25
P50
P75
P90
Probit
IV-Probit
0.2911***
0.2564***
-0.0691
-0.6903***
-0.9799***
0.0623
0.0261
-0.2875***
-0.8611***
-1.1838***
Table: Marginal probability effects of TrustinBanks on borrower discouragement
(Pr(BorrowerDiscouragement=1)) at different percentile levels of
InterpersonalTrust
Ali Recayi OGCEM (Málaga)
Trust in banks and borrower discouragement
6th July 2023
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Summary Table: Robustness Checks
Robustness
Check
Subsamples
Subsamples according to Firm
Size
Firms’
Bank
Credit Reliance
Alternative Estimation Technique:
Heckman Probit
Subsample
p-value
Effect of Trust
Audited
Est. Coefficient
-0.052
0.078
Unaudited
0.071
0.042
SMEs
-0.039
0.101
Decreases discouragement
Increases discouragement
Decreases discouragement
Non-SMEs
-0.027
0.143
-
0.086
0.036
-
-0.067
0.022
Ali Recayi OGCEM (Málaga)
Trust in banks and borrower discouragement
Decreases discouragement
Increases reliance
on bank credit
Decreases discouragement
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Concluding Remarks
- Trust in banks and interpersonal trust are essential for promoting credit
access and financial inclusion.
- Policymakers can use these insights to design interventions that reduce
credit constraints and enhance firms’ access to formal finance.
- Strengthening trust in banks and fostering interpersonal trust are vital
for building a resilient and inclusive financial ecosystem.
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Trust in banks and borrower discouragement
6th July 2023
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Thank You!