LAUSR

This paper analyzes the importance of credit self-rationing for borrowers with lower levels of education using a survey of Vietnamese SMEs from 2004 to 2014. We show that entrepreneurs not only refrain from using formal credit because of burdensome application procedures but also because they are inherently debt-averse. Both factors are more prevalent in entrepreneurs with lower educational levels. Consistently, borrowers with lower education have a lower propensity of using formal credit, are more likely to perceive financial constraints, and are more likely to report difficulties during the loan application process. However, we find no evidence of higher supply-side rationing by banks for entrepreneurs with lower educational levels. Our results imply that efforts targeted at alleviating actual financial constraints will have limited results if debt aversion and apprehension towards formal finance are not properly addressed. The best way to do this is to favor better education.