Is societal trust a driver of private debt financing in microfinance institutions?

Purpose Using data from 62 countries, I present empirical evidence of the impact of societal trust on the capital structure for microfinance institutions. Design/methodology/approach The study uses fixed-effect models, instrumental variable analysis, propensity score matching and mediating analysis. Findings Societal trust is positively associated with private debt for microfinance institutions (MFIs). One standard deviation increase in trust leads to a 9.72% rise in private debt financing. The legal status of the MFIs, board gender diversity and average loan size moderate the relationship, while monitoring costs mediate it. Research limitations/implications To the best of my knowledge, this is the first study to document the impact of societal trust on the capital structure in the microfinance industry. The study’s main limitation is that MFI data coverage is limited to 2018. Originality/value My findings reveal a novel insight: despite the difference in capital structure in the microfinance sector, societal trust is still a driver of private debt.