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The Role of Banks in SME Finance

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  • Norden, L.

Abstract

__Abstract__ Banks play a crucial role for the financing of small and medium-sized enterprises (SMEs). SMEs represent a large fraction of all firms in many economies and contribute significantly to employment and growth. But, SMEs are more informationally opaque, more risky, more financially constrained, and more bank-dependent than large firms, which creates serious challenges in SME finance. In this inaugural address, I focus on lending technologies to cope with key challenges in SME finance. I present evidence from two recent empirical studies. The first conclusion is that relationship lending works. Applying meta-analysis in a cross-country context, we show that, on average, borrowers benefit from relationship lending. SMEs obtain more credit and/or lower loan rates under relationship lending. Furthermore, bank competition makes benefits for borrowers more likely. The second conclusion is that trade credit has limited scope to replace bank debt when the latter is subject to a shock. SMEs in Europe have countered a shock to their bank debt to some extent with trade credit. However, substitution has become increasingly difficult during the financial crisis and was only possible for a subset of firms: the ones with better credit quality and intermediate financial constraints. Overall, a comprehensive understanding of lending technologies such as relationship lending and trade credit is critical for lenders, borrowers, and policymakers to ensure the proper functioning of SME finance.

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  • Norden, L., 2015. "The Role of Banks in SME Finance," ERIM Inaugural Address Series Research in Management EIA-2015-062-F&A, 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..
  • Handle: RePEc:ems:euriar:77636
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    More about this item

    Keywords

    Banks; SME Finance; Bank Lending; Banking; Finance; Credit; Lending Technology; Relationship Lending; Trade Credit;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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