Loans to Family and Friends and the Formal Financial System in Latin America

Abstract

In Latin America, over 50% of the population has relied on loans from family members or friends, reflecting the importance of trust-based networks in response to financial exclusion. This study examines how distrust in the formal financial system influences the use of informal borrowing. Using data from 17 countries for the years 2014, 2017, and 2021, and applying a fixed-effects logistic regression model by country and time, we confirm that rising distrust significantly increases the likelihood of turning to loans from personal networks. This relationship intensifies in times of crisis. Beyond this, we find that macroeconomic variables such as GDP per capita and unemployment also significantly affect informal borrowing behavior. This research contributes to the literature by integrating institutional, economic, and social variables, highlighting the role of interpersonal trust as a form of social capital. It also advances the field of personal finance by revealing an everyday strategy of financial resilience. Finally, this study offers relevant implications for public policy, advocating for a more realistic and context-sensitive approach to financial inclusion, especially in regions where credit constraints in the formal sector have pushed households to seek more accessible and flexible alternatives.

1. Introduction

Latin America and the Caribbean (LAC) is a region that faces high levels of poverty (29%), labor informality (53.7%), and inequality (Gini: 0.46), with low financial inclusion and credit restrictions, where only 30% had access to formal credit in 2021 (World Bank, 2023; ECLAC, 2023). In addition to this, there is a deep distrust in the financial system (51% average in LAC in 2021), which is the result of recurring crises, corruption, and weak institutions (Latinobarómetro, 2023).

Faced with these structural restrictions in the region, loans between family and friends have emerged as a practical and culturally rooted response, due to the strong sense of collectivism that distinguishes LAC. In this context, family and friendship ties naturally extend to the financial sphere to provide financial support in this environment. Thus, in 2021, a staggering 52% of the Latin American population had borrowed from family or friends; this is a figure that is significantly higher than the global average of 30% (World Bank, 2021). This form of financing, based on interpersonal trust and reciprocity, has established itself as a pillar of everyday household finances, especially among those with less access to formal financial products. Its flexibility, lower costs, and reduced information asymmetry make it a key instrument for maintaining economic stability in the context of financial exclusion, especially in times of financial uncertainty, such as those currently experienced in the region.

This research provides a new perspective by linking distrust in the financial system with the likelihood of resorting to informal loans from family and friends. Using individual (person) and macroeconomic (country) data from 17 LAC countries for the years 2014, 2017, and 2021, and using a logistic econometric model with fixed effects, time, and country, it is evident that in contexts where distrust in institutions predominates, an increase in distrust in the financial system significantly increases the likelihood of using loans from family and friends in LAC countries. This finding is consistent with what occurs on the credit supply side in the region, since, in situations of crisis or macroeconomic instability, banks tend to tighten credit conditions, limit their risk exposure, and restrict access to formal financing, especially for low-income households or those without a credit history (Waliszewski et al., 2023; Didier Brandao et al., 2022). This restriction on formal credit forces many people to turn to alternative, informal sources, such as family and friends, to cover their financial needs. On the demand side, although to a lesser extent, it is also observed that specific individuals who do meet the requirements to access the formal financial system voluntarily decide not to use these services due to subjective perceptions of mistrust. This decision is not due to structural barriers, but rather to factors such as previous negative experiences, fear of losing their resources, distrust in the stability of the system, or the lack of transparency in financial institutions. Therefore, both approaches, i.e., restricted supply and demand conditioned by perception (to a lesser extent), help explain the high use of credit among close networks in LAC. It is also shown that other macroeconomic variables, such as higher unemployment and lower GDP per capita, are also associated with greater use of this type of loan.

This study contributes to the literature in the following aspects: First, it empirically analyzes a form of informal credit frequently ignored by financial studies, despite its high prevalence in LAC. This topic has not yet been addressed from an empirical and regional perspective in LAC. Second, it integrates the institutional trust approach with household economics and financing decisions. Integrating trust as a key social capital demonstrates how these family networks function as self-financing mechanisms that strengthen household financial resilience. Third, it proposes an analytical framework that links macroeconomic structures, institutional perceptions, and individual financial behaviors, offering relevant implications for public financial inclusion policies. Fourth, this research strengthens the field of personal finance by providing evidence on how households in LAC cope with credit constraints through alternative financing strategies. This type of evidence helps us understand how people maintain their financial stability, manage emergencies, sustain consumption, or undertake economic activities, even without access to formal credit. Additionally, it offers a comparative regional perspective, considering structural differences between countries with high and low financial development within LAC, which allows us to understand how the role of informal credit varies according to the region’s characteristic institutional environment.

Additionally, one of the most relevant contributions of this research is the identification of the potential multiplier effect, whereby a decrease in trust in the financial system leads to increased use of informal credit, which in turn can reproduce and amplify financial exclusion. Although these informal loans act as resilience mechanisms, they can also perpetuate financial marginalization and limit the expansion of efficient credit through the banking system.

Finally, an integrative perspective is proposed that connects financial innovation with traditional practices, highlighting the importance of trust and social networks in complementing the formal financial system. This approach fosters new research that integrates financial economics, sociology, and development studies, thereby offering a more holistic understanding of financial inclusion in contexts characterized by high levels of restriction and exclusion.

This research is organized as follows: the second section presents the context of LAC; the third section provides a theoretical analysis to ground the research within the framework to which it intends to contribute; the fourth section presents the data and methodology used; the fifth section analyzes and discusses the results; and finally, the conclusions are presented.

2. Latin American Context

Latin America and the Caribbean (LAC) is one of the regions with the highest levels of poverty, inequality, and economic informality in the world. By 2022, approximately 29% of the region’s population was living in poverty, compared to 45% in 2002 (ECLAC, 2023).

While there have been improvements, it still represents a higher proportion compared to other regions (World Bank, 2023). Furthermore, informal employment accounted for 53.7% of total employment in 2022 (International Labour Organization, 2023), indicating a lack of access to formal financial services, social protection, and fundamental labor rights, among other benefits. In addition, there are high levels of inequality, with an average Gini coefficient of 0.46, which is significantly higher than the OECD average of approximately 0.31, indicating a high concentration of income (ECLAC, 2023).

In terms of economic performance, Latin America has been widening the gap in its GDP per capita with traditionally industrialized countries for decades (Clements et al., 2024). It has failed to overcome a structure characterized by corruption (Corbacho et al., 2015), insecurity (Zmerli & Castillo, 2015), and nepotism (Güemes, 2019). Latin America has not managed to significantly improve its productivity and generate a true and sustained welfare state. All these factors, along with the history of recurring financial crises, have eroded citizen confidence in institutions, including the financial system. Regarding confidence in the financial system, while 69% of adults in the region expressed financial distrust, the world average was 38% (Ghosh, 2021). The lack of confidence in the financial system in Latin America is due to a history of negative real interest rates, drastic depreciation, and failed decisions in the face of crises (IMF. External Relations Dept., 2004). Bank runs in countries such as Argentina, Ecuador, and Mexico directly or indirectly affected all citizens (Bonilla et al., 2008). The weakness of the financial system occurred in the context of relatively lower levels of formal institutional and judicial structures (Nicolas et al., 2023). This is also due to low banking coverage, especially in rural areas and among low-income segments. As of 2017, approximately half (46%) of the population in LAC, on average, did not have a bank account with a formal financial institution. Furthermore, as of 2021, approximately half (30%) of the population, on average, had a formal loan in LAC (World Bank, 2021). This highlights the gaps, restrictions, and limitations that persist in the LAC region regarding financial services. Based on this context, it is essential to investigate loans between family and friends as an alternative form of financing in the LAC region and as a mechanism for economic resilience. Analyzing this form of financing will enable us to understand the following two key factors: how individuals cope with credit restrictions and how trust in financial institutions influences their economic decisions. This research analyzes 17 Latin American countries. This regional work enables us to examine the substantial differences in development and inequality among countries with similar behavioral patterns. The region was selected due to the need to analyze instruments capable of promoting economic growth, particularly in settings where informal strategies remain prevalent despite lacking formal legitimacy.

3. Theoretical Framework

3.1. Confidence in the Financial System

Trust defines economic well-being, social prosperity, and economic growth (Knell & Stix, 2015). In low-income countries, trust generates healthier economic and social development (Fukuyama, 1995) and mitigates risks in countries with weak formal institutions and limited legal rights (Abdelsalam et al., 2024). Trust in the financial system is a key condition for its use. In the case of the financial system, trust determines its capacity for growth by influencing its depth (Kanagaretnam et al., 2019), the diversity of available tools, and the coverage it achieves (Calderón et al., 2002). The growth of the financial system, rather than improving its efficiency and effectiveness, defines the development of emerging countries (Fitzgerald & Wolak, 2016). Regarding economic and financial contexts, trust in the banking system is positively related to the business cycle (Afandi & Habibov, 2017), GDP growth rate (Stevenson & Wolfers, 2011), and the performance of the rule of law (Afandi & Habibov, 2017). Trust influences the financial model through supply and demand when considering the credit system. On the supply side, in environments with greater confidence in the economic system, banks will be more willing and able to lend money to individuals (Jin et al., 2020), and credit will even be granted with certain advantages, such as lower interest rates (Galiani et al., 2022) and transaction costs (Xu, 2020), as well as with less stringent collateral requirements (Jackowicz et al., 2024). Regarding credit demand, public trust is fundamental because it determines consumers’ willingness to use credit and formal financial products (Soumaré et al., 2016; Broekhoff et al., 2024; Nicolas et al., 2023). Meanwhile, increases in distrust in the financial system may have the opposite effect on the credit market. On the supply side, greater distrust in the financial system can lead to greater restrictions on formal credit. Given that increased distrust in the banking system often occurs during periods in which a country’s socioeconomic context worsens (Laferrère & Wolff, 2006), the financial system perceives this alertness and greater credit risk. Waliszewski et al. (2023) show that during financial crises, banks restrict credit. Rojas-Suárez (2016) shows that banks have low-risk tolerance in unstable macroeconomic contexts, and as a result, many people in LAC are left without access to credit.

Meanwhile, due to demand, in situations of widespread distrust, a particular group of people may decide not to apply for formal credit, even if it is available. Even those with the ability to pay and who have potential access to formal financial services may choose not to use them due to a lack of trust or previous negative experiences (Rojas-Suárez, 2016; Presbitero & Rabellotti, 2016). These experiences can stem from previous banking crises, corruption scandals, discriminatory treatment, or a lack of transparency. People who have experienced banking crises are more likely to expect another crisis in the present and near future. Aversion to the financial system after experiencing a crisis persists over time, up to a decade later (Wälti, 2012). Therefore, affected individuals may avoid using the financial system (Knell & Stix, 2015; Koomson et al., 2023). This phenomenon suggests that not all financial exclusion is the result of structural flaws in the system, but may also arise from subjective factors.

Therefore, the effects of distrust in the financial system must be analyzed from a supply and demand perspective in the credit market. The supply approach may be the most prevalent in economies (Didier Brandao et al., 2022).

3.2. Responses to Financing Needs

Focusing on the credit supply, credit restrictions, understood as the barriers that prevent access to formal financial services, are manifested in strict collateral requirements, high transaction costs, exclusive evaluation criteria, or a lack of institutional presence in some geographical regions (Galindo & Schiantarelli, 2002; Barajas & Steiner, 2002; Ahamed et al., 2021). These restrictions and barriers to credit are especially for informal workers, small entrepreneurs, and low-income households (Galindo & Schiantarelli, 2002; Barajas & Steiner, 2002; Makler et al., 2013). Faced with these restrictions, since financing needs continue to exist and must be met, especially during processes in which the socioeconomic context of a country worsens (Beramendi et al., 2016), financing alternatives have emerged that respond to these liquidity needs, including informal credit between family and friends and non-bank lending markets (suppliers and FinTech-LendTech platforms), all of which operate with different criteria than traditional banking. These alternatives make it possible to fill, at greater or lesser cost and risk, the gap left by the formal system, especially in informal or low-income segments (Didier Brandao et al., 2022). Therefore, credit restrictions not only exclude but also redefine the channels of access to credit. This dynamic is crucial for understanding the significance of alternative financing sources in environments characterized by structural exclusion or institutional distrust.

Recent literature has made considerable progress in analyzing the role played by non-bank lending markets, particularly FinTech (LendTech) providers, as solutions to the constraints of the formal banking system. Studies such as those by Kowalewski and Pisany (2022), Hodula (2022), and Waliszewski et al. (2023) have shown that these entities have managed to expand access to financing in countries with high levels of financial exclusion, banking inefficiency, and high banking concentration, particularly during economic crises, pandemics, or conflicts. For LAC, studies by Didier Brandao et al. (2022) and Bakker et al. (2023) agree with these results. Non-bank lending markets play a countercyclical role, complementing and partially replacing bank credit in times of credit restrictions (Waliszewski et al., 2023).

However, little or no attention has been paid in the literature to the study of other forms of financing, such as loans between family and friends, despite their widespread use (Liu & Yin, 2024). This form of credit also represents a significant, and often more accessible and culturally rooted, response to other financing alternatives. This is especially true because the growth of informal financial sectors is driven by the underdevelopment of formal finance and is correlated with lower levels of inclusive banking (Beck et al., 2008; Ahamed et al., 2021). Therefore, a significant gap exists in the literature that must be addressed to better understand the entire credit ecosystem and its implications for financial inclusion. This research aims to fill that gap.

3.3. Credit Market Between Family and Friends

Credit between family and friends is understood as a decision based on trust, social ties, and flexible terms. This form of financing has several characteristics that differ from traditional bank credit. First, the absence of formal guarantees means that trust between counterparties is used as collateral for loans between family and friends (Guiso et al., 2000), which would be lost if agreements were not met, thereby generating family tensions (Szeidl et al., 2009). These loans are based on a non-altruistic model, in which support between community members results from a reciprocity contract (Fromell et al., 2020). Second, this form of financing has lower financing costs (Xu, 2020) because it offers zero or lower interest rates compared to formal and informal loans (Karaivanov & Kessler, 2016), and it provides greater flexibility, including longer terms (Smith et al., 2023). Third, it presents fewer information asymmetries and less opportunism; borrowers and lenders share direct information and prior relationships, which reduces uncertainty and limits strategic behavior (Hoff & Stiglitz, 1993; Li & Hua, 2023). This strengthens borrowers’ perceptions of their ability to repay (Karaivanov & Kessler, 2016).

Their flexibility makes these loans an accessible and socially accepted source of financing. Loans between family and friends are commonly used to cover basic needs such as food, medical expenses, education, or housing payments, as well as to address emergencies or to start or maintain small businesses and ventures (Liu & Yin, 2024; Engelberg et al., 2012; Mertzanis, 2019). In addition, they are a fundamental tool to support productive activities such as agriculture, facilitating the purchase of inputs, fertilizers, or seeds, and helping households face losses caused by climatic phenomena or harvest delays (Turvey & Kong, 2010). By covering these diverse uses, loans between family and friends can function as an adjustment mechanism in the face of liquidity restrictions and can directly contribute to key aspects characteristic of personal and household finances by facilitating the continuity of consumption, reducing exposure to more expensive formal and informal debts (usury), and allowing for better financial planning (prioritizing expenses or developing savings habits), thereby sustaining economic well-being (Baulkaran, 2022; Farías, 2019; Banasaz et al., 2025). Furthermore, they can generate a multiplier effect by allowing households to cover needs and finance productive activities, boosting local entrepreneurship, increasing demand, fostering employment, and stimulating the circulation of resources, thus contributing to the economic dynamism of the community (Smith et al., 2023). At the macroeconomic level, various studies indicate that strengthening credit among family and friends can contribute to growth and financial development, especially in contexts where formal structures are weak. In China, for example, studies have shown that this type of financing has boosted growth and financial inclusion (Turvey & Kong, 2010; Liu & Yin, 2024). This is consistent with Abdelsalam et al. (2024), which concludes that strengthening credit among family and friends reduces market risk and improves financial and economic stability, especially in regions where formal institutional structures are less solid.

In high-income countries, around 30% of the population has access to this type of credit; in Latin America, the percentage reached 52% in 2021 (World Bank, 2021). This reflects not only greater financial informality in the region but also a distinct social structure in which the family occupies a central place as a source of economic and emotional support. Eighty percent of Latin Americans consider the family to be the institution they trust the most (Keefer & Scartascini, 2022), a perception reinforced by factors such as the role of religion, limitations in infrastructure, geography (Dohmen et al., 2012), and a deeply rooted community culture (Vaggione & Machado, 2020).

In this context, credit between family and friends becomes a crucial mechanism for economic resilience, particularly in environments characterized by high informality, limited banking access, and distrust of financial institutions. This type of financing, therefore, represents an adaptive response to structural exclusion from the formal financial system.

Based on the foregoing, this study hypothesizes that greater distrust in the financial system is associated with an increase in lending to family and friends. Given the nature of this research, particular attention is devoted to informal lending behavior, taking into account macroeconomic factors such as GDP per capita and the unemployment rate. We expect that higher levels of GDP per capita and lower unemployment rates are associated with a reduced reliance on lending to family and friends.

4. Data and Methodology

4.1. Data

To test the proposed hypothesis, we use data from 17 Latin American countries for the years 2014, 2017, and 2021, compiled from various sources. Information on individuals who reported using—or not using—financing from family and/or friends in the past year, along with their socio-economic characteristics (such as age, gender, income, and education level), was obtained from the World Bank (2021). Data on trust in financial institutions were obtained from the Latinobarómetro (2023), whose surveys are based on public opinion, measuring attitudes and behaviors. The level of trust in financial institutions was obtained at the country level. For further details, refer to

Table A2. Results of the estimated coefficients for the determinants of the probability of using credits from family and friends.

	(1)	(2)	(3)
VARIABLES	General	FD Low	High FD
distrust_of_banks	0.920 ***	0.704 ***	1.667 ***
	(0.182)	(0.211)	(0.360)
GDPpc	−0.610 **	−0.404 ***	−4.131 ***
	(0.275)	(0.0802)	(0.668)
unemployment	0.163 ***	0.123 ***	0.177 ***
	(0.00859)	(0.0139)	(0.0119)
women	−0.135 ***	−0.197 ***	−0.0630 *
	(0.0250)	(0.0347)	(0.0360)
years of schooling	−0.250 ***	−0.336 ***	−0.109 *
	(0.0435)	(0.0589)	(0.0660)
age	0.0310 ***	0.0263 ***	0.0353 ***
	(0.00401)	(0.00554)	(0.00585)
square_age	−0.000603 ***	−0.000536 ***	−0.000667 ***
	(4.68 × 10−5)	(6.48 × 10−5)	(6.83 × 10−5)
quintiles5	0.0516	0.0869	0.0257
	(0.0415)	(0.0577)	(0.0600)
quintiles4	0.150 ***	0.180 ***	0.118 **
	(0.0408)	(0.0569)	(0.0587)
quintiles3	0.220 ***	0.240 ***	0.203 ***
	(0.0408)	(0.0566)	(0.0589)
quintiles2	0.148 ***	0.150 ***	0.148 **
	(0.0418)	(0.0581)	(0.0602)
Country and time controls	Yes	Yes	Yes
Constant	2.377	0.679	36.43 ***
	(2.677)	(0.721)	(6.470)
Observations	50,078	25,993	24.085

Standard errors in parentheses *** p < 0.01, ** p < 0.05, * p < 0.1.

in the Annex, which provides descriptive information about the data.

The financial development (FD) indicator constructed by the International Monetary Fund was used as a proxy. It is based on nine indicators that measure the level of access, depth, and efficiency of the countries’ financial systems. For the purposes of this study, Latin American countries are classified into two groups based on the highest and lowest levels of financial distrust observed in the region. Country-level macroeconomic variables, specifically GDP per capita and the unemployment rate, were obtained from the World Bank (2021). It is interesting to obtain differentiated results among LAC countries because there are significant differences among them. On the one hand, economies like Uruguay and Costa Rica have significantly improved their structure and performance. In contrast, countries like Ecuador and Bolivia have seen their ability to generate more and better capacities continually decline.

Figure 1 shows that, on average, in LAC, 51% of the population lacks confidence in the financial system. Furthermore, 52% of the population uses loans from family and friends to cover their financing needs. This research seeks to identify the relationship between these variables.

In this regard, the distrust in financial institutions variable has decreased on average by 8% during the selected period, from 55% in 2014 to 51% in 2021. In the final year of the study (2021), Ecuador recorded the highest level of financial distrust in the region, at 62%. In contrast, Uruguay (36%) and the Dominican Republic (37%) reported the lowest levels. On the other hand, the percentage of loans to family and friends in the selected period, 2014 – 2021, increased in the region, rising from an average of 37% in 2014 to 52% in 2021. For 2021, Guatemala, Honduras, and Paraguay had the highest levels of credit from family and friends (68%), (67%), and (66%), respectively. The countries with the lowest levels of informal credit were Uruguay (31%) and Brazil (34%).

In this case, Uruguay has a low level of distrust toward financial institutions, which is related to its low level of informal loans to family and friends. This is because the country is distinguished by its high level of financial development and economic stability. Uruguay is recognized for being an egalitarian society, with high per capita income levels and low poverty rates. The middle class is the largest in Latin America, representing more than 60% of the population. Furthermore, it has the most equitable income distribution in South America (World Bank Group, 2024). All of this is reflected in the trust it has in domestic and foreign investment. Uruguay ranks second in Latin America in the Milken Institute’s Global Opportunity Index, which evaluates a country’s potential to attract foreign investors (Switek et al., 2025). Another key factor that strengthens trust in the Uruguayan financial system is the strength of its institutions. Uruguay is characterized by a strong and predictable rule of law, which fosters macroeconomic stability and a favorable environment for financial actors. The country also ranks among the top three in the region in terms of financial inclusion. This high level of inclusion, combined with a banking system that offers accessible and reliable financial products, promotes greater trust in formal financial services and reduces reliance on informal mechanisms. Moreover, Uruguay has been one of the most resilient economies in the region, maintaining stable macroeconomic indicators even in the aftermath of the COVID-19 pandemic (Inter-American Development Bank, 2021). This resilience further strengthens the positive perception of the financial system and supports the idea that, in an environment of trust and stability, informal credit is lower.

In short, these figures show that distrust in the financial system and the use of informal loans may be closely related. Countries with stronger institutions and greater financial inclusion within the LAC region, such as Uruguay, demonstrate that environments of trust reduce the need to resort to informal loans.

4.2. Methodology

To estimate the probability that people use credit from family and friends given different characteristics, the following Equation (1) is applied:

$$Y_{ij}=\alpha +\mathsf{\beta }{X}_{jt}+\mathsf{\gamma }{Z}_{it}+{\epsilon }_{ij},\hspace{1em}j=1,\dots ,J;i=1,\dots$$

(1)

where $Y_{ij}$ is the dependent binary variable ($Y$ = 1) if credit from family and friends is used; $i$ is the individual; $j$ is the country; $\mathrm{X}$ is the set of macroeconomic variables at the national level of country $j$ at time $\mathrm{t}$ (GDP per capita, unemployment, distrust in the financial system at the national level); and $\mathrm{Z}$ is the set of individual $i$ control variables at time $\mathrm{t}$ (gender, age, income quintiles, and education).

In addition, we use country-level fixed effects in the regressions (Wooldridge, 2010). The logistic equation has the form given in Equation (2) (Stock et al., 2012):

$$\log \left({\displaystyle \frac{p\left(Y=1|X_{jt}{Z}_{it}\right)}{1-p\left(Y=1|X_{jt}{Z}_{it}\right)}}\right)={\beta }_0+{\beta }_1{X}_{jt}+{\beta }_2{Z}_{it}$$

(2)

where $p$ is the probability that the family and friends credit variable is equal to 1; and ${\beta }_0+{\beta }_1$……are the estimated coefficients in the model.

Marginal Effects

Since the dependent variable is binary and the estimated coefficients cannot be directly interpreted in terms of probability, marginal effects are computed. Given the non-linear nature of logistic models, we report the average marginal effects, calculated at the mean of all independent variables using the logistic probability distribution function (Stock et al., 2012). Logit models are related to the partial derivative of the probability estimated for each independent variable.

In these models, the effect of the explanatory variable can be calculated as follows:

$${\displaystyle \frac{\partial Pr\left(y_i=1|X_i\right)}{\partial X_{ik}}}={\displaystyle \frac{\partial F\left({x^{\prime }}_i\beta \right)}{\partial X_{ik}}}=f({x^{\prime }}_i\beta ){\beta }_k$$

(3)

where $F(.)$ is the distribution function and $f(.)$ is the density function.

In this way, elasticity is obtained by relating the marginal effect to the means of the explanatory variables. Marginal effects are simplified as a measure of elasticity. This represents the percentage change in the probability that the dependent variable changes due to a change in the explanatory variable. In this case, it can be expressed as follows:

$${\displaystyle \frac{\partial Pr\left(y=1|X_{jt}{Z}_{it}\right)}{\partial X_{jt}{Z}_{jt}}}\times {\displaystyle \frac{X_{jt}{Z}_{it}}{Pr\left(y=1|X_{jt}{Z}_{it}\right)}}={\displaystyle \frac{\partial y}{\partial X_{\mathit{jt}}{Z}_{\mathit{it}}}}\times {\displaystyle \frac{X_{\mathit{jt}}{Z}_{\mathit{it}}}{Y}}=\epsilon$$

(4)

This expresses the average effect of the independent variable on the probability of occurrence of the contrast category of the dependent variable, $y=1$. In this way, it is possible to infer the average effect on the probability at the population level. Therefore, the results will be interpreted as the difference in the change in the likelihood of occurrence of the event between the two comparison groups (in percentage points) (Ballesteros, 2018).

Estimates are carried out to determine the microeconomic and macroeconomic determinants of the informal credit market for family and/or friends at a general level for Latin America, differentiating between countries with low and high financial development.

5. Results

The model results are presented in

Table 1. Results of the estimates of the determinants of the probability of using credit from family and friends, with marginal effects.

	(1)	(2)	(3)
VARIABLES	General LAC	FD under LAC	High FD LAC
Distrust ofbanks	0.124 ***	0.094 ***	0.227 ***
	(0.024)	(0.028)	(0.0489)
GDPpc	−0.082 **	−0.054 ***	−0.562 ***
	(0.037)	(0.0107)	(0.0908)
unemployment	0.022 ***	0.016 ***	0.024 ***
	(0.001)	(0.0018)	(0.0017)
women	−0.018 ***	−0.026 ***	−0.0086 *
	(0.003)	(0.0046)	(0.0049)
primary	−0.034 ***	−0.045 ***	−0.0149 *
	(0.006)	(0.0078)	(0.0090)
secondary	−0.0065	−0.015	0.0035
	(0.005)	(0.0072)	(0.0072)
age	0.004 ***	0.0035 ***	0.0048 ***
	(0.0005)	(0.00074)	(0.00079)
Age2	−0.000008 ***	−0.00007 ***	−0.00009 ***
	(6.32 × 10−6)	(8.64 × 10−6)	(9.29 × 10−6)
Quintiles5	0.007	0.012	0.0035
	(0.0056)	(0.0077)	(0.0082)
Quintiles4	0.020 ***	0.024 ***	0.016 **
	(0.0055)	(0.0076)	(0.0080)
Quintiles3	0.030 ***	0.032 ***	0.028 ***
	(0.0055)	(0.0075)	(0.0080)
Quintiles2	0.020 ***	0.020 ***	0.020 **
	(0.0056)	(0.0077)	(0.0082)
Country and time control	Yes	Yes	Yes
Observations	50,078	25,993	24.085

Standard errors in parentheses *** p < 0.01, ** p < 0.05, * p < 0.1.

, with marginal effects. The variables of interest are significant at the 99% level. The estimated coefficients are included in Appendix A.

The results are obtained from all LAC economies considered in this research (1), exclusively for LAC economies with low FD (2), and finally for those LAC economies that have a higher FD (3). For this study, Latin American countries are classified into two groups based on the highest and lowest levels of financial distrust observed in the region.

Based on the formulated hypothesis, the results indicate that an environment characterized by greater distrust in the financial system increases the likelihood of using loans from family and friends in Latin American countries. Specifically, a one percentage point increase in financial distrust within a country’s environment raises the probability of obtaining loans from family and friends to meet financial needs by an average of 12 percentage points. This effect is more pronounced in countries with higher levels of financial development. In environments with greater distrust, the probability of using loans from family and friends increases by 9 percentage points in countries with lower financial development, and by 22 percentage points in countries with high financial development in Latin America and the Caribbean (LAC). Figure 2 presents the marginal effects of distrust in the financial system on the probability of using loans from family and friends.

Overall, the results confirm that the level of trust in institutions and among individuals transcends credit market decisions in Latin America. Increased distrust in banks paves the way for greater use of credit among family and friends. This relationship is stronger in countries with high FD compared to those with low FD. The financial development (FD) threshold for using loans among family and friends responds to multiple factors related to credit constraints and trust in the formal financial system. In more financially developed countries within LAC, although families tend to have greater resources to lend, they also face higher expectations and levels of trust in the formal financial system. However, when this trust is affected or access to formal credit is restricted due to stricter conditions or economic crises, people turn more intensively to alternative sources of financing, such as networks of family and friends, where they perceive greater control and trust. In contrast, in countries with less financial development in LAC, limited banking infrastructure, high informality, and structural restrictions on formal credit make dependence on the financial system less complex and access to formal credit more difficult. Therefore, the practice of resorting to informal loans is more entrenched and less influenced by fluctuations in trust, which explains the lower impact of mistrust on the use of credit among acquaintances.

Regarding the control variables, an increase of 1 unit in log_GDPpc reduces the probability of borrowing from family and friends by 8.2 percentage points in Latin America. An increase in GDP per capita reduces the probability of borrowing from family and friends more in countries with high FD (56 percentage points) than in countries with low FD (5 percentage points). Unemployment is positively correlated with the volume of borrowing from family and friends, particularly in the most developed economies. The results show that an increase in unemployment increases the probability of using informal loans from family and friends by 2 percentage points, on average, in Latin America. Variations in unemployment also reveal differences in the probability of using loans from family and friends between countries with higher or lower levels of FD. With higher unemployment, the probability of using loans from family and friends increases by 1 percentage point, on average, in countries with low FD. In contrast, the increased likelihood of borrowing from family and friends is 2 percentage points in countries with high FD. Other macroeconomic factors, such as GDP per capita and unemployment levels, also influence the market for borrowing from family and friends in Latin America. According to the results obtained in this research, greater economic well-being is associated with a reduction in the likelihood of borrowing from family and friends. Rising unemployment increases the probability of borrowing from family and friends in Latin America. Being unemployed makes people less reliable and riskier when it comes to obtaining and repaying loans in the formal financial sector. Unemployed individuals often lack the necessary requirements to access loans from financial institutions, such as stable income or collateral. Rising unemployment contributes to a sense of economic instability and may lead to broader economic contraction. As a result, financial institutions become more reluctant to extend credit, prompting individuals to turn to informal financing from friends or family as a viable alternative. In this context, social capital—rooted in trust-based personal networks—can serve as an immediate response to the absence of stable income.

Individual characteristics also influence the use of the credit market among family and friends. For men, the use of this type of credit increases with age and as the number of years of schooling decreases. Regarding income level, the model compares the probability of obtaining a loan from a family member or friend in each quintile with that of quintile 1. Quintiles 2, 3, and 4 have a higher probability compared to quintile 1. Families with lower incomes are less likely to be able to resort to loans from family and friends because their environment has fewer resources and because they have fewer social connections.

Discussion of Results

The empirical results confirm that environments with greater distrust of the formal financial system increase the likelihood of borrowing from family and friends in LAC countries. This finding is consistent with the region’s structural context, characterized by high levels of informal employment, low financial inclusion, and a history of banking crises. These factors fuel persistent distrust of financial institutions. Furthermore, the results reflect a widely documented reality in LAC, where credit restrictions limit access to formal financing, especially among the most vulnerable sectors. This restriction intensifies in periods of economic instability, when banks tend to reduce the supply of credit due to the perceived increase in risk, tightening access conditions, and further excluding the population. Faced with this lack of access to formal credit, many people turn to alternative sources of credit, including loans from family and friends, which offer greater flexibility, lower requirements, and, in many cases, more favorable terms. These forms of financing not only compensate for the shortcomings of the credit market but also allow for more flexible and, in many cases, lower-cost loans. Moreover, these results can also be explained from a subjective perspective, where even with access to the formal financial system, the perception of insecurity or unfair treatment leads certain groups to avoid it, opting instead for loans from close acquaintances, where interpersonal trust prevails. Finally, in LAC, loans between acquaintances are integrated into social practices of reciprocity and solidarity, which reinforces their legitimacy as a common source of financing.

The results also suggest the existence of a potential multiplier effect, as when trust in the financial system decreases, not only does the likelihood of resorting to loans from family and friends increase, but also, as informal financing increases, a dynamic is consolidated where financial exclusion can be reproduced and amplified. On the one hand, reliance on informal loans can strengthen community support networks and financial self-management. This type of informal financing feeds broader networks of economic support. However, it could also limit these individuals’ integration into the formal financial system, perpetuating vicious cycles of exclusion and reducing their ability to access efficient credit intermediation. This occurs in a context where access to formal credit is restricted by barriers such as informal employment, lack of credit history, and low bank coverage. Despite their risks, these informal loans have been a key response to meeting liquidity needs in the region, acting as a complement or partial substitute for financial inclusion in LAC.

6. Conclusions

This research provides novel empirical evidence on the link between distrust in the formal financial system and the likelihood of resorting to loans from family and friends in Latin America and the Caribbean (LAC), a region characterized by deep financial exclusion, high labor informality, and low levels of institutional trust (ECLAC, 2023; Latinobarómetro, 2023). Using data from 17 countries for the years 2014, 2017, and 2021, and applying a logistic model with fixed effects, we demonstrate that contexts of high financial distrust significantly increase the use of this type of credit. For the first time in a regional study for LAC, distrust in the financial system is linked to the use of loans between family and friends, incorporating macroeconomic and microeconomic variables in an integrated analysis.

The results of this research suggest that when confidence in the financial system declines, the likelihood of borrowing from family and friends increases in Latin America. These results confirm that, in an environment where access to formal credit is limited by structural conditions such as insufficient bank coverage, high access requirements, and risk aversion on the part of financial institutions (Waliszewski et al., 2023; Didier Brandao et al., 2022), people turn to alternative financing strategies based on personal ties and social capital (Fromell et al., 2020; Karaivanov & Kessler, 2016). This behavior intensifies in situations of crisis or economic instability, when both the supply and demand for formal credit are affected (Rojas-Suárez, 2016; Wälti, 2012). When the system reduces its access, depth, and efficiency indicators, citizens turn to their family and friends, either because they no longer have a place in the formal model or because they have lost confidence in the traditional system. Interpersonal trust, unlike institutional trust, emerges as a key asset in everyday financial decision-making, positioning loans between family and friends as mechanisms of financial resilience for households, especially the most vulnerable (Guiso et al., 2000; Baulkaran, 2022). It should be noted that, while loans between family and friends are a traditional response to the exclusion of formal credit, they are not the only alternative. In recent years, new forms of non-bank financing have emerged, including FinTech and LendTech platforms, which also address the lack of access to credit in contexts of high informality and exclusion. Thus, the financial ecosystem in LAC combines informal strategies and innovative technologies that seek to reduce structural gaps in financial inclusion. This research focuses on the first strategy.

This study makes several significant contributions. First, it offers contextualized and regional views of informal credit among family and friends in LAC, highlighting its high prevalence and alternative financing mechanism in the face of restrictive and inequitable formal financial systems (Beck et al., 2008; Ahamed et al., 2021). Second, it contributes to the literature on finance and personal finance by integrating institutional, macroeconomic, and sociocultural dimensions into the analysis of household financial behavior (Knell & Stix, 2015; Abdelsalam et al., 2024). This highlights a segment of the credit market, often overlooked by conventional financial theory, which is crucial to understanding the dynamics of financing in economies (Liu & Yin, 2024; Engelberg et al., 2012). Third, it proposes a more holistic view of the concept of financial inclusion, highlighting that it should not be limited to access to formal services, but should incorporate the recognition of informal forms of financing as an integral and functional part of the financial ecosystem (Soumaré et al., 2016; Calderón et al., 2002). Finally, it highlights a potential multiplier effect, where the decline in trust in the financial system encourages the use of informal credit, which in turn can reinforce financial exclusion. Although these loans strengthen support networks and economic resilience, they can also limit integration into the formal system, perpetuating cycles of credit marginalization, especially in contexts of high informality and structural restrictions on banking access, if they are not articulated with strategies for transitioning to banking access.

Regarding public policy implications, the findings highlight the need to rebuild citizen trust in financial institutions through greater transparency, clear rules, and consumer protection (Kanagaretnam et al., 2019). It is recommended that financial products be designed to adapt to informal realities, recognizing informal credit histories as a starting point for financial inclusion. This could include collective guarantee schemes, community-backed digital platforms, or microcredit instruments linked to social networks. In addition to developing financial education programs with a contextual and community focus (Broekhoff et al., 2024), financial education could serve as an empowerment tool (Fitzgerald & Wolak, 2016), allowing people to better understand how the system works, identify products appropriate to their needs, assess risks, and make more informed decisions. Furthermore, it is essential to institutionally acknowledge credit practices among close social ties, not to formalize them by force, but to protect those who rely on them and to promote their integration into broader financial inclusion frameworks. Public policies should also support strategies aimed at strengthening the capacity and effectiveness of this form of financing. The fact that the third quintile is the one that participates most in this type of financing offers a key opportunity to promote strategies aimed at strengthening the middle class, which is destined to lead the region’s development.

These results open new lines of relevant research. Future research could explore the role of FinTech platforms as bridges between informal and formal credit (Kowalewski & Pisany, 2022), longitudinally analyze the effects of financial exclusion on economic mobility, or incorporate qualitative methodologies that allow for an understanding of the cultural and relational elements that underpin interpersonal credit (Vaggione & Machado, 2020; Dohmen et al., 2012). It would also be valuable to study whether the intensive use of informal credit contributes to or limits long-term financial integration.

This study has some limitations. There is no information available on the specific conditions of informal loans (amounts, terms, rates), which limits the analysis of their direct economic impact. Furthermore, it is not possible to establish strict causal relationships, but rather significant statistical associations between the variables studied.

In summary, this research underscores that loans between family and friends constitute a core component of the financial landscape in Latin America and the Caribbean (LAC). Their prevalence, perceived legitimacy, and functionality reflect not only structural shortcomings in the formal financial system but also the strength of social networks that operate as effective mechanisms of economic support. Understanding this dynamic enriches the academic literature and offers critical insights into the formulation of public policies that are more inclusive, context-sensitive, and culturally adapted to the region’s specific realities. Recognizing this form of credit from a policy perspective allows for a targeted response to a widespread phenomenon, affecting approximately 52% of the population, with considerable potential to promote financial inclusion and development. Despite this, the topic remains underexplored, primarily due to its divergence from orthodox financial theory and the historical lack of empirical data. Its relevance lies in the urgent need for development tools that are both effective and adapted to local capacities.