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SMALL BUSINESS LENDING AND CREDIT RISK: GRANGER CAUSALITY EVIDENCE

Ahmet Faruk Faysan () and Mustafa Disli

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: Because of their opaque nature, SMEs are overly reliant on bank lending. Therefore, we examine whether banks’ credit supply to SMEs are affected by their financial conditions. To this end, we employ a Granger causality analysis to examine whether there is an indication of a significant direction of determination between SME lending and non-performing SME loans. The results reveal no bidirectional relationship between SME lending and NPL for the entire banking sector. For Islamic banks, however, we find two-way linkages between these two parameters: a negative causation is running both from SME lending to NPL growth and from NPL to SME lending. Given Islamic banks’ deposit-oriented funding practices and their adherence to profit-and-loss sharing principles, this finding suggests the presence of heightened market discipline within the Islamic banking system.

Keywords: Small business lending; Non-performing loans; Islamic banks. (search for similar items in EconPapers)
JEL-codes: G21 G28 G3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-ent
Date: 2019-03
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:19/963

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