Discouraged borrowers and the importance of countries' lending infrastructure for SMEs

This paper investigates the impact of countries’ lending infrastructure on the likelihood of firms becoming discouraged borrowers. We capture this lending infrastructure with proxies for countries’ information, legal, judicial, bankruptcy, tax and regulatory environments derived from Berger and Udell's (2006) conceptual model. Using a sample of 28,886 small and medium sized firms (SMEs) from the World Bank Enterprise Survey (WBES) spanning across developed and developing economies, we find all proxies of the countries lending infrastructure impact the likelihood of borrower discouragement. Greater sharing of credit information, weaker legal rights, less efficient judicial and bankruptcy regimes, lower corporate tax rates and a stronger regulatory environment reduces the likelihood of SMEs becoming discouraged borrowers. In particular, credit information sharing, weaker legal rights, inefficient judicial and bankruptcy regimes and stronger regulatory quality matters more for certain cohorts, as depicted in the sub samples. Overall, our results have implications for policies aimed at enhancing the quality of countries lending infrastructure in an effort to encourage more SMEs to apply for finance.