Trust and Risk: Evidence from Rural Banks in Emerging Markets

Research Originality: This research is the first to discuss how rural bank risk-taking behaviour is affected by trust particular when the poverty rate is high. Research Objectives: This research aims to investigate how in rural banks is shaped by the two dimensions of trust taking into account different poverty levels across the region. Research Methods: To thoroughly conduct our research, use quarterly dataset of rural banks obtained from the financial service authority (OJK) for the period of 2010Q2 to 2016Q3 when the bail-out regime was still in effect. We employ a random effect model to account for individual heterogeneity. Empirical Results: Our evidence suggests that in-group is detrimental to rural banks' risk. Conversely, out-group positively affects rural banks' stability only if the region a lower poverty level. Implications: To reduce risk, the rural bank has to use social capital and penetrate informally to the market where in-group trust is high to be able to compete with informal lending to contribute better to society.