Determinants of discouraged borrowers and gender as contextual factors: evidence from Indonesian MSMEs

Mardika, Dhoni Rizky Widya; Damayanti, Theresia Woro; Rita, Maria Rio; Supramono, Supramono Article Determinants of discouraged borrowers and gender as contextual factors: evidence from Indonesian MSMEs Cogent Business & Management Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Mardika, Dhoni Rizky Widya; Damayanti, Theresia Woro; Rita, Maria Rio; Supramono, Supramono (2024) : Determinants of discouraged borrowers and gender as contextual factors: evidence from Indonesian MSMEs, Cogent Business & Management, ISSN 2331-1975, Taylor & Francis, Abingdon, Vol. 11, Iss. 1, pp. 1-13, https://doi.org/10.1080/23311975.2024.2336300 This Version is available at: https://hdl.handle.net/10419/326207 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Business & Management ISSN: 2331-1975 (Online) Journal homepage: www.tandfonline.com/journals/oabm20 Determinants of discouraged borrowers and gender as contextual factors: evidence from Indonesian MSMEs Dhoni Rizky Widya Mardika, Theresia Woro Damayanti, Maria Rio Rita & Supramono Supramono To cite this article: Dhoni Rizky Widya Mardika, Theresia Woro Damayanti, Maria Rio Rita & Supramono Supramono (2024) Determinants of discouraged borrowers and gender as contextual factors: evidence from Indonesian MSMEs, Cogent Business & Management, 11:1, 2336300, DOI: 10.1080/23311975.2024.2336300 To link to this article: https://doi.org/10.1080/23311975.2024.2336300 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 05 Apr 2024. Submit your article to this journal Article views: 1090 View related articles View Crossmark data Citing articles: 2 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oabm20 ManageMent | ReseaRch aRticle Cogent Business & ManageMent 2024, VoL. 11, no. 1, 2336300 Determinants of discouraged borrowers and gender as contextual factors: evidence from Indonesian MSMEs Dhoni Rizky Widya Mardika, theresia Woro Damayanti, Maria Rio Rita and supramono supramono Faculty of economics and Business, universitas Kristen satya Wacana, salatiga, indonesia ABSTRACT this study aims to examine the effect of application costs, trust reciprocity, and self-efficacy on discouraged borrowers and the role of gender as a moderating variable. Our sample was 356 micro, small, and medium enterprise actors in the manufacturing industry in central Java Province, indonesia. the data was analyzed using the covariant-based structural equation modeling method. the results demonstrated that application costs, trust reciprocity, and self-efficacy significantly affect discouraged borrowers. however, the contextual role of gender is not fully proven because it can only weaken the self-efficacy effect of discouraged borrowers. this study enriches the literature by proposing discouraged borrowers from a demand factor perspective. in addition, it also offers policy suggestions for the banking industry to collaborate intensively with other stakeholders to increase banking digital literacy and build capacity to foster mutual trust and self-efficacy among micro, small, and medium enterprise actors. IMPACT STATEMENT the problem of lack of access to bank credit faced by micro, small, and medium enterprises is not only related to the problem of being unable to meet bank credit needs but also due to the willingness of MsMes themselves to choose not to apply for credit from banks because of the concern that their application will be declined or what is commonly known as discouraged borrowers. this issue must be addressed to help micro, small, and medium enterprise actors mitigate their financing obstacles through better access to bank credit. therefore, this study aims to analyze the factors that cause micro, small, and medium enterprises to become discouraged borrowers. this study will offer several policy actions to banks and related stakeholders regarding application fees, the development of e-banking features, and banking literacy to encourage micro, small, and medium enterprises to utilize banking financing. 1. Introduction Micro, small, and medium enterprises (MsMe) actors greatly contribute to economic growth (Verma etal., 2020). For example, in developing countries like indonesia, in 2022, the number of MsMes reached 99% of the total business units, absorbed 96.9% of the workforce, and contributed to the gross domestic product of 60.5% (Kompas, 2023). however, MsMe actors in indonesia still often experience limited access to bank credit (hutahayan, 2019; the Organisation for economic co-operation & Development, 2022; Wulandari etal., 2017) so they face the problem of a lack of financing. the indonesian government has made efforts to make policies to minimize credit interest for MsMes (coordinating Ministry for economic affairs, 2022) but has kept the amount of MsMe bank loans the same. Meanwhile, around 75% of MsMes prefer to meet their capital needs from moneylenders (cable news network indonesia, 2023). MsMes must bear very high-interest rates, which often causes MsMes to work only to pay their debts to moneylenders (chakraborty & Mahanta, 2023). © 2024 the author(s). Published by informa uK Limited, trading as taylor & Francis group CONTACT supramono [email protected] Faculty of economics and Business, universitas Kristen satya Wacana, salatiga, indonesia https://doi.org/10.1080/23311975.2024.2336300 this is an open access article distributed under the terms of the Creative Commons attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. the terms on which this article has been published allow the posting of the accepted Manuscript in a repository by the author(s) or with their consent. ARTICLE HISTORY Received 17 February 2023 Revised 12 February 2024 accepted 25 March 2024 REVIEWING EDITOR huifen (helen) cai, Middlesex University Business school, United Kingdom KEYWORDS Discouraged borrowers; application costs; trust reciprocity; self-efficacy; gender SUBJECTS small Business Management; gender studies - soc sci 2 D. RiZKY WiDYa MaRDiKa etal. the lack of access to bank financing for MsMes is not only related to the problem of inability to meet bank credit requirements but also the choice factor of MsMes themselves. it is possible that MsMes have the adequate capacity to have bank credit, but their owners intend to do something other than apply for bank credit (Mardika etal., 2018; Mccarthy etal., 2017). One of the reasons is the concern that their application will be declined or what is commonly known as discouraged borrowers. this phenomenon is common in countries like the United states of america, eastern europe, and several central asian countries (gama et al., 2017). this issue must be addressed to help MsMe actors mitigate their financing obstacles through better access to bank credits. thus, it is important to comprehensively analyze the determinants of discouraged borrowers (Khan et al., 2021). several previous studies (comeig etal., 2015; Fernández-Méndez & gonzález, 2019; Menkhoff etal., 2012) have investigated what causes discouraged borrowers from the supply side, banks tend to incur information asymmetry and find it difficult to evaluate MsMe actors’ creditworthiness. Based on the work of Kon and storey (2003), information asymmetry encourages banks to increase credit interest rates, demand complicated credit requirements, and require higher collaterals. consequently, MsMe actors incur higher credit rates, complicated credit requirements, and higher collaterals when applying for credits. Meanwhile, other research has investigated the demand side and found the cause related to location factors (gama et al., 2017). longer distances between banks and MsMe actors increase application costs (Xiang & Worthington, 2015). consequently, MsMe actors consider their application costs higher regarding time spent traveling to the banks and filling in the application forms (Yazdanfar & Öhman, 2020). Besides application costs, prior studies also indicate trust determines discouraged borrowers (hirsch etal., 2018; howorth & Moro, 2012; Moro & Fink, 2013). transaction-based lending and relationship-based lending are the two factors that might help define the interaction between MsMe players and banks. transaction-based lending refers to formal relationships between MsMe actors and banks, including their business feasibility, financial reporting quality and interest rates (gray & Premti, 2021). Meanwhile, informal relationships, sometimes emotionally developed, are more frequently used in relationship-based lending, as evidenced by MsMe actors’ trust in banks (De la torre et al., 2010). tang et al. (2016) demonstrated that higher trust reduces discouraged borrowers. however, their study only analyzes MsMe actors’ trust in banks, while bank credits are related to mutual trust between banks and MsMe actors. thus, a two-way trust or trust reciprocity between these entities is crucial. trust reciprocity motivates MsMe actors to trust in banks and consider banks to trust in their ability to meet credit requirements and repayment obligations. accordingly, this study investigates the effect of application costs and trust reciprocity as a determinant of discouraged borrowers. Dare et al. (2022) documented that self-efficacy motivates individuals to apply for bank credits. this finding can be further interpreted that MsMe actors with high self-efficacy tend not to be discouraged borrowers. self-efficacy refers to the extent to which an individual believes in his or her capacity to execute behaviors necessary to produce specific performance attainments (Bandura, 1997). if it is related to the context of the choice of financing sources, MsMes who are confident in their capacity to manage their business, pay installments and interest on loans regularly have the potential not to avoid bank credit as a source of financing (Farrell etal., 2016). MsMe actors tend to exhibit greater self-efficacy and acquire more resources like investor financing, equipment, and sponsorship (Maitlo et al., 2020). hence, this study will also include self-efficacy as one of the factors expected to influence discouraged borrowers. gender also warrants further analysis because it likely weakens the effect of the determinants on discouraged borrowers. several prior studies have discovered that banks tend to discriminate against female MsMe actors because female entrepreneurs are riskier (aristei & gallo, 2022; Berguiga & adair, 2021). Besides, females deal with more complicated credit requirements (De andrés et al., 2021; Malmström & Wincent, 2018), making females less willing to take risky bank credits. hence, gender can weaken the effects of application costs, trust reciprocity, and self-efficacy on discouraged borrowers, and this study uses gender as the moderating variable. this study attempted to investigate the effect of application costs, trust reciprocity, and self-efficacy on discouraged borrowers among MsMe actors in indonesia and the role of gender as a moderating variable. the contribution of this study to the existing literature is to provide a better understanding of discouraged borrowers in at least two aspects. First, prior studies on discouraged borrowers have cOgent BUsiness & ManageMent 3 empirically demonstrated the determinants of discouraged borrowers in various countries, like india (chakravarty & Xiang, 2013), china (tang etal., 2016), europe (cowling etal., 2016) and tanzania (naegels et al., 2021). however, similar studies in asian countries like indonesia are still limited. second, we included trust reciprocity and self-efficacy as the independent variables and gender as the contextual factor in our model, while these variables have not been explained before. Meanwhile, a practical contribution is to offer policy recommendations to reduce discouraged borrowers in MsMe actors so that they will choose bank credit as an alternative source of financing to develop their business. 2. Literature review and hypothesis development 2.1. Theory of discouraged borrower this study uses the framework of the theory of discouraged borrowers introduced by Kon and storey, (2003) to investigate what drives MsMes to become discouraged borrowers. they use an institutional approach, extends the standard static adverse selection model of credit markets by integrating imperfect screening factors by banks and application cost borne by borrowers. in conditions of information asymmetry between banks and borrowers, banks are increasingly stringent in screening to avoid screening errors by rejecting ‘good’ borrower applications or approving ‘bad’ borrower applications. the quality of the screening carried out by the bank has discouraged MsMes from applying for bank loans. in other words, discouraged borrowers arise because of the self-rationing mechanism of MsMe actors who believe their credit will be rejected, so they are reluctant to apply for credit. in fact, the reluctance of MsMe actors to apply for credit not only limits sources of financing but can also cause investment activities to become less than optimal, impacting business performance (Freel etal., 2012). in addition, discouraged borrowers are related to the scale of application costs. MsMes can be discouraged from applying for bank loans when they bear higher application cost. the theory of discouraged borrowers also posits the role of interest rate disparities charged by banks and money lenders. the smaller the difference, the greater the discouragement, so MsMes are less likely to apply for a bank loan. conversely, the greater the potential for MsMes to seek alternative financing outside the banking sector. in summary, the theory of discouraged borrowers emphasizes economic perspectives, such as the application of costs and interest rates, to explain MsMe’s discouragement decision, and it is still open to development by incorporating other perspectives. this study includes psychological factors such as trust, reciprocity, and self-efficacy. in addition, it also involves individual characteristics, especially gender, as a contextual factor, which moderates the effects of economic and psychological factors. 2.2. Application costs and discouraged borrowers the theory of discouraged borrowers explains that information asymmetry in the banking industry makes it difficult for banks to identify MsMe actors’ creditworthiness. consequently, banks tend to increase interest rates and set complicated requirements to mitigate credit default risks (le & nguyen, 2019). Meanwhile, potential MsMe actors will compare the costs of credit applications with their business profits. Kon and storey (2003) explained that application costs MsMe actors’ sacrifices to apply for bank credits, consisting of time devoted to going to the banks, time devoted to complete credit requirements, costs to prepare reliable financial statements, and costs due to sharing their business information to external parties. the theory of discouraged borrowers also argued that MsMe actors who incur higher application costs are less comfortable in applying for credits (Kon & storey, 2003) and consequently less motivated to rely on bank credits as their financing sources. Prior empirical results also revealed that higher application costs increase discouraged borrowers (gama etal., 2017). accordingly, the following is the testable hypothesis: h1: application costs positively affect discouraged borrowers 4 D. RiZKY WiDYa MaRDiKa etal. 2.3. Trust reciprocity and discouraged borrowers trust should be reciprocal (Freel etal., 2012). While banks must trust in MsMe actors, MsMe actors must also trust in banks. hence, this study focuses on trust reciprocity instead of one-sided trust. trust from banks to borrowers can help compensate for information asymmetry and behavioral uncertainty in credit repayments (Moro & Fink, 2013). Banks that trust MsMe actors borrowers tend to reduce their application costs (hagendorff et al., 2023). conversely, MsMes must also have confidence that banks believe in MsMes (Martínez-tur etal., 2020). MsMe actors with greater trust in banks are more willing to apply for bank credits. however, they may have several psychological obstacles, like fear of rejected applications, higher interest rates, collaterals, and complicated credit procedures (currall & Judge, 1995; Das & teng, 1998). thus, the trust reciprocity of MsMe actors will likely reduce the fear that bank credit applications will be rejected, which will encourage MsMes to apply for bank loans. Furthermore, the hypothesis formulation can be proposed as follows: h2: trust reciprocity negatively affects discouraged borrowers 2.4. Self-efficacy and discouraged borrowers MsMe actors’ self-efficacy refers to individuals’ self-confidence to effectively manage and develop their businesses. Various obstacles like the fear of rejection, higher interest rates and collateral, and complicated credit procedures cause discouraged borrowers. higher self-efficacy ensures that MsMe actors can repay their credits. consequently, they are more confident applying for credits (cole & sokolyk, 2016; Kon & storey, 2003). individuals with lower self-efficacy worry that they will be unable to develop their businesses. conversely, those with higher self-efficacy consider themselves capable of developing their businesses. individuals with higher self-efficacy develop more positive feelings toward money and are arguably more willing to make decisions (Farrell etal., 2016), including applying for credits. consequently, the following is the testable hypothesis: h3: self-efficacy negatively affects discouraged borrowers 2.5. Gender as a moderator Females and males exhibit different risk preferences (alonso-almeida & Bremser, 2015; ammer & ahmad-Zaluki, 2017). Female entrepreneurs are arguably less willing to take risks (Buratti et al., 2017). MsMe actors unwilling to take risks tend to rely on more safe financing (ginesti etal., 2018). hence, the gender of MsMe actors is also closely associated with their decisions to apply for bank credits. however, there are still pros and cons related to gender bias in applying for bank loans. several studies have shown that female-managed MsMes submit fewer credit applications than their male counterparts (galli etal., 2020; Moro etal., 2017; Ongena & Popov, 2016), but arcuri etal. (2024) study shows that a lower application rate by female-led MsMes is not proven. in fact, hewa-Wellalage et al. (2021) provide evidence that MsMes managed by females are higher in submitting credit applications than those managed by males. in indonesia, most people adhere to a patriarchal culture, leading to the dominance of men as decision-makers. even though MsMes are managed by a wife, business strategic decisions, including finance, are still in the hands of the husband (Richard et al., 2013; shohel etal., 2021). thus, MsMes led by females are likely reluctant to apply for bank credits because they still need the approval of their husbands. taking into account risk preferences and patriarchal culture, female entrepreneurs are predicted to strengthen the positive impact of application costs on discouraged borrowers. gender is also contextual in the relationship between trust reciprocity and discouraged borrowers. the presence of female entrepreneurs can weaken the negative impacts of trust reciprocity and self-efficacy on discouraged borrowers. hence, the following are the testable hypotheses: cOgent BUsiness & ManageMent 5 h4a: Female entrepreneurs gender tends to strengthen the positive effect of application costs on discouraged borrowers. h4b: Female entrepreneurs gender tends to weaken the negative effect of trust reciprocity on discouraged borrowers h4c: Female entrepreneurs gender tends to weaken the negative effect of self-efficacy on discouraged borrowers the path of the relationship between the dependent, independent, and moderating variables in this study is visualized in Figure 1. the application cost is expected to have a positive effect on discouraged borrowers. Meanwhile, trust, reciprocity, and self-efficacy have a negative effect. Furthermore, the presence of female entrepreneurs is predicted to strengthen the positive effect on application costs and weaken the negative effect of trust reciprocity and self-efficacy on discouraged borrowers. 3. Research method Our research population was MsMe actors in the manufacturing industry in central Java Province, indonesia. currently, the manufacturing industry has the largest contribution to the indonesian economy. Meanwhile, the location selection was based on the consideration that central Java is widely known to have many MsMe centers. Data regarding the existence of each MsMe actor who was the target of respondents was obtained from the central Java cooperative Office and survey results in the field. the sample selection used the purposive sampling method with the following criteria: a. MsMe actors who sought external finance three years ago but have yet to request bank credits. b. MsMes have been established for up to eight years. c. the MsMe owners were still at the core of all business decisions. Data collection was carried out through a field survey method involving six enumerators. During the 14 days of the survey, 356 respondents were obtained, who were then used as the sample for this study. this sample size exceeded the minimum sample size of −100, as hair et al. (2019) suggested. if using structural equation Modeling analysis and the model contains five or fewer variables, each variable has more than three indicators with high item commonality. table 1 depicts the respondents’ characteristics generated by the field survey. We measured the discouraged borrowers variable by using several indicators: not applying for credits out of fear of denied applications, too high interest rates, higher collaterals, and too complicated credit procedures. the indicators were adopted from chakravarty and Xiang (2013). the application cost (ac) variable was adopted by Kon and storey (2003) definition, which included costs incurred to complete credit requirements, time spent to fill in the forms, time spent to meet bank officers, and inconvenience in revealing business information. next, the operationalization of the trust reciprocity (tR) variable encompassed MsMe actors’ confidence that banks trust in their ability to provide collaterals, repay the Figure 1. Research model. source: self-constructed. 6 D. RiZKY WiDYa MaRDiKa etal. credits, increase their business growth, and generate profits. the indicators were adapted from (Fehr & gächter, 2000). the self-efficacy (se) variable refers to individuals’ belief in completing tasks and responsibilities (themanson & Rosen, 2015) and was measured with the indicators of the ability to generate consumers, promote products, manage finance, and produce high-quality products. the indicators were adopted from (chen et al., 1998). the results of all variables above were measured using the 5-point likert scale. Meanwhile, as the moderating variable, the gender variable (g) was measured with a dummy variable that equals one if the respondent is female and zero otherwise. Data were analyzed using covariance-based structural equation modeling because it is more suitable for model testing, which is oriented to confirming a theory, in this case, discouraged borrower’s theory. this technique combines confirmatory factor analysis (cFa) and multiple regression. in addition, this technique can analyze both observed and unobserved variables (hair etal., 2019). Following Merhi etal. (2021), we analyzed the moderating role of the gender variable by comparing the results of the female and male subsamples. gender strengthens the effects of the independent variables on the dependent variable when the results in the male subsample are insignificant, and the results are significant for the female subsample. conversely, gender weakens the impact of the independent variable on the dependent variable when the results are significant for the male subsample and not for the female subsample. however, gender cannot moderate when the results are insignificant for both subsamples. 4. Results and discussion 4.1. Results the convergent validity test was carried out to identify the validity of the indicators in measuring variables. in contrast, the reliability test using cronbach’s alpha identified the consistency of the indicators in measuring the latent variables. in covariance-based structural equation modeling, the factor loading values ≥0.70 and cronbach alpha ≥0.70 are acceptable (hair et al., 2019). Figure 2 and table 2 present the results of the validity and reliability tests, suggesting that all indicators met the criteria because their values are ≥ 0.70. the results of the model fit test indicate the chi-square of 313.329, a probability value of 0.176, gFi of 0.950, agFi of 0.930, RMsea of 0.010, and tli of 0.997. table 3 demonstrates the complete results, implying that the model fits. table 4 indicates the results of the causality test. h1 indicates that application costs positively and significantly affect discouraged borrowers (ß = 1.056; p-value = 0.000). next, h2 demonstrates that trust reciprocity significantly and negatively affects discouraged borrowers (ß = −0.105; p-value = 0.026). lastly, h3 implies that self-efficacy negatively and significantly affects discouraged borrowers (ß= −0.145; p-value = 0.013). thus, all hypotheses predicting the direct effects of application costs, trust reciprocity, and self-efficacy on discouraged borrowers are empirically supported. Table 1. Descriptive statistics of respondents’ characteristics. Category n Proportion (%) Business age 2013–2015 284 79.78% 2016–2018 72 20.22% owner age <20 51 14.33% 21–30 78 21.91% 31–40 193 54.21% >41 34 9.55% Firm size Micro 299 83.99% small 54 15.17% Medium 3 0.84% source: Primary Data, processed (2022). cOgent BUsiness & ManageMent 7 Figure 2. Confirmatory factor analysis for the proposed model. source: self elaborated (2022). Table 2. Validity and reliability test. Variable Factor loading Cronbach alpha aC1 0.701 0.840 aC2 0.795 aC3 0.739 aC4 0.783 tR1 0.859 0.940 tR2 0.869 tR3 0.918 tR4 0.900 se1 0.830 0.912 se2 0.857 se3 0.884 se4 0.834 DB1 0.824 0.924 DB2 0.885 DB3 0.901 DB4 0.864 source: self-elaborated (2022). Table 3. goodness of fit test. goodness of fit Value Criteria status 1. Chi-square probability level 0.176 >0.05 good 2. goodness of fit index (gFi) 0.950 >0.90 good 3. adjusted goodness of fit (agFi) 0.930 >0.90 good 4. Root mean square error of approximation (RMsea) 0.010 <0.08 good 5. normed fit index (nFi) 0.963 >0.90 good 6. Parsimonious normal fit index (PnFi) 0.778 >0.60 good source: Primary data, processed (2022).