Trust in banks and borrower discouragement

This paper contributes to unravel the determinants of borrower discouragement, i.e., the fact that economic agents who need credit feel less inclined to borrow from a bank. Specifically, we use worldwide firm-level data to examine the role played by informal institutions, particularly trust in banks, in potentially reducing borrower discouragement. Lack of trust may explain such discouragement, and hence to enhance funding stability and the use of formal financial instruments, increasing trust could be determinant. Our empirical results show that firms are less likely to get discouraged from borrowing from financial institutions in countries where trust in banks is relatively high. Moreover, we also find a lower prevalence of borrower discouragement in countries where both trust in banks and interpersonal trust are high. These results stress the role played by informal institutions in influencing firms' access to credit via self-rationing. Overall, our results highlight the importance of building confidence and trust in banks to encourage formal credit demand and the use of formal finance, which is crucial for achieving financial inclusion.