IDEAS home Printed from https://ideas.repec.org/a/wsi/jdexxx/v16y2011i04ns108494671100194x.html
   My bibliography  Save this article

THE DETERMINANTS OF RISK PREMIUM: THE CASE OF BANK LINES OF CREDIT GRANTED TO SMEs

Author

Listed:
  • JOSÉE ST-PIERRE

    (Université du Québec à Trois-Rivières, Institut de recherche sur les PME, 3351, Boulevard des Forges, Trois-Rivières (QC) Canada G9A 5H7, Canada)

  • MOUJIB BAHRI

    (Teluq-Université du Québec à Montréal, 100, Sherbrooke Ouest, Montréal (QC) Canada H2X 3P2, Canada)

Abstract

The goal of this paper is to gain a better understanding of the factors that determine the risk premium on bank lines of credit obtained by SMEs, and whether firm size, which may be used by banks to segment their client base, also has an impact on credit costs. An analysis of data from 406 SMEs in Canada showed the main determinants of risk premium were firm size, line of credit size, ability to repay, the relationship between banker and entrepreneur, and the length of the relationship with the bank. These determinants change according to the market segment in which the potential borrower operates. Banks appear to use a transactional approach for smaller borrowers, where credit terms are based on quantitative financial data, and a relational approach for larger firms, where relationship length and quality become significant.

Suggested Citation

  • Josée St-Pierre & Moujib Bahri, 2011. "THE DETERMINANTS OF RISK PREMIUM: THE CASE OF BANK LINES OF CREDIT GRANTED TO SMEs," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 459-476.
    • Handle: RePEc:wsi:jdexxx:v:16:y:2011:i:04:n:s108494671100194x
    DOI: 10.1142/S108494671100194X
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S108494671100194X
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S108494671100194X?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Cresenta Fernando & Atreya Chakraborty & Rajiv Mallick, 2002. "The Importance of Being Known: Relationship Banking and Credit Limits," Finance 0209007, University Library of Munich, Germany.
    2. Lehmann, Erik & Neuberger, Doris, 2001. "Do lending relationships matter?: Evidence from bank survey data in Germany," Journal of Economic Behavior & Organization, Elsevier, vol. 45(4), pages 339-359, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cynthia Sin Tian Ho & Björn Berggren, 2020. "The effect of bank branch closures on new firm formation: the Swedish case," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 65(2), pages 319-350, October.
    2. Canton, E.J.F. & Grilo, I. & Monteagudo, J. & van der Zwan, P.W., 2012. "Perceived credit constraints in the European Union," ERIM Report Series Research in Management ERS-2010-001-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    3. Erik Canton & Isabel Grilo & Josefa Monteagudo & Peter Zwan, 2013. "Perceived credit constraints in the European Union," Small Business Economics, Springer, vol. 41(3), pages 701-715, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Aitziber Olasolo, 2021. "Credit Risk Elements for Small and Medium-Sized Enterprises: The Case of Spain," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 192-219.
    2. Simon Cornée, 2014. "Soft Information and Default Prediction in Cooperative and Social Banks," Journal of Entrepreneurial and Organizational Diversity, European Research Institute on Cooperative and Social Enterprises, vol. 3(1), pages 89-103, June.
    3. Kislat, Carmen & Menkhoff, Lukas & Neuberger, Doris, 2013. "The use of collateral in formal and informal lending," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79765, Verein für Socialpolitik / German Economic Association.
    4. Goergen, Marc & Manjon, Miguel C. & Renneboog, Luc, 2008. "Recent developments in German corporate governance," International Review of Law and Economics, Elsevier, vol. 28(3), pages 175-193, September.
    5. Hussain, Inayat & Durand, Robert B. & Harris, Mark N., 2021. "Relationship lending: A source of support or a means of exploitation?," Global Finance Journal, Elsevier, vol. 48(C).
    6. Bellucci, Andrea & Borisov, Alexander & Zazzaro, Alberto, 2013. "Do banks price discriminate spatially? Evidence from small business lending in local credit markets," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4183-4197.
    7. Gabriele Angori & David Aristei, 2020. "Heterogeneity and state dependence in firms’ access to credit: Microevidence from the euro area," SEEDS Working Papers 0220, SEEDS, Sustainability Environmental Economics and Dynamics Studies, revised Feb 2020.
    8. Carlos Arriaga & Luis Miranda, 2009. "Risk and Efficiency in Credit Concession: A Case Study in Portugal," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 7(3), pages 307-326.
    9. Simon Cornée & David Masclet & Gervais Thenet, 2012. "Credit Relationships: Evidence from Experiments with Real Bankers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(5), pages 957-980, August.
    10. Tensie Steijvers & Wim Voordeckers, 2009. "Collateral And Credit Rationing: A Review Of Recent Empirical Studies As A Guide For Future Research," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 924-946, December.
    11. Marcin Grzelak, 2019. "The Hold-up Problem and Banking Relationships: Evidence from the Polish SME Sector," Prague Economic Papers, Prague University of Economics and Business, vol. 2019(6), pages 670-687.
    12. Leo De Haan & Elmer Sterken, 2006. "The impact of monetary policy on the financing behaviour of firms in the Euro area and the UK," The European Journal of Finance, Taylor & Francis Journals, vol. 12(5), pages 401-420.
    13. Doris Neuberger & Solvig Räthke, 2009. "Microenterprises and multiple bank relationships: The case of professionals," Small Business Economics, Springer, vol. 32(2), pages 207-229, February.
    14. Nakashima, Kiyotaka & Takahashi, Koji, 2020. "The time has come for banks to say goodbye: New evidence on bank roles and duration effects in relationship terminations," Journal of Banking & Finance, Elsevier, vol. 115(C).
    15. Ashiqur Rahman & Jaroslav Belas & Tomas Kliestik & Ladislav Tyll, 2017. "Collateral requirements for SME loans: empirical evidence from the Visegrad countries," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 18(4), pages 650-675, July.
    16. Berger, A.N. & Frame, W.S. & Ioannidou, V., 2012. "Reexamining the Empirical Relation between Loan Risk and Collateral : The Role of the Economic Characteristics of Collateral," Other publications TiSEM 5c03486b-e818-472a-86da-c, Tilburg University, School of Economics and Management.
    17. repec:ces:ifodic:v:11:y:2013:i:1:p:19083495 is not listed on IDEAS
    18. Hakimi, Abdelaziz & Hamdi, Helmi, 2013. "The duration of bank relationships and the performance of Tunisian firms," MPRA Paper 55754, University Library of Munich, Germany, revised 2014.
    19. Bruder, Jana & Neuberger, Doris & Räthke-Döppner, Solvig, 2008. "Financial constraints of ethnic entrepreneurship: Evidence from Germany," Thuenen-Series of Applied Economic Theory 84, University of Rostock, Institute of Economics.
    20. Dorothea Schäfer & Dirk Schilder, 2008. "Smart capital in German start-ups -- an empirical analysis," Venture Capital, Taylor & Francis Journals, vol. 11(2), pages 163-183, August.
    21. Allen N. Berger & W. Scott Frame & Vasso P. Ioannidou, 2011. "Reexamining the empirical relation between loan risk and collateral: the roles of collateral characteristics and types," FRB Atlanta Working Paper 2011-12, Federal Reserve Bank of Atlanta.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:jdexxx:v:16:y:2011:i:04:n:s108494671100194x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/jde/jde.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.