Does Corruption Impact the Demand of Bank Credit? A Study of Discouraged Borrowers in Asian Developing Countries

Abstract

Two dysfunctions can affect the credit market: credit rationing and firm's discouragement. While the former has been studied in detail for more than 40 years, the latter has only been in the spotlight since 2003. In this work, we contribute to the understanding of this “demand-side failure” by investigating the role played by corruption. In particular, using data coming from Enterprise Surveys conducted by World Bank, we highlight, on the one hand, a significant negative effect of the corruption on “discouraged borrowers” in developing countries, and on the other, that this effect differs according to the level of economic development: in higher (resp. lower) development countries, higher level of corruption will discourage (resp. encourage) firms from applying for loans. We also find burden of government regulation is a channel to explain for this effect. To get over burdens in regulation, firms find corruption as one way to reach their targets at lower costs.