Small business lending and credit risk: Granger causality evidence |
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| Institution: | 1. School of Management and Administrative Sciences, Istanbul Sehir University, Istanbul, Turkey;2. Faculty of Economics and Business Administration, Ghent University, Ghent, Belgium;1. School of Economics and Management, Beihang University, Beijing, 100191, China;2. College of Business, University of Nevada, Reno, Reno, NV 89557, USA;1. Accident Compensation Corporation, Wellington, New Zealand;2. School of Economics, Finance and Marketing, RMIT University, Building 80, Level 11, 445 Swanston Street, Melbourne, VIC 3000, Australia;1. School of Data Sciences, Zhejiang University of Finance and Economics, Hangzhou, Zhejiang, 310018, PR China;2. Department of Statistics, The University of British Columbia, Vancouver, BC, Canada;1. Universidad Catolica de Murcia, Avda. Los Jerónimos, 135, 30107 Murcia, Spain;2. Instituto Flores de Lemus, Spain;1. Musashi University, Japan;2. University of Tokyo, Japan;3. Kwansei Gakuin University, Japan |
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| 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. |
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| Keywords: | Small business lending Non-performing loans Islamic banks G21 G28 G3 |
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