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Small business lending and credit risk: Granger causality evidence

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  • Aysan, Ahmet Faruk
  • Disli, Mustafa

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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  • Aysan, Ahmet Faruk & Disli, Mustafa, 2019. "Small business lending and credit risk: Granger causality evidence," Economic Modelling, Elsevier, vol. 83(C), pages 245-255.
    • Handle: RePEc:eee:ecmode:v:83:y:2019:i:c:p:245-255
    DOI: 10.1016/j.econmod.2019.02.014
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    Cited by:

    1. Aysan, Ahmet Faruk & Unal, Ibrahim Musa, 2021. "A Bibliometric Analysis of Fintech and Blockchain in Islamic Finance," MPRA Paper 109712, University Library of Munich, Germany.
    2. Francesco Ciampi & Alessandro Giannozzi & Giacomo Marzi & Edward I. Altman, 2021. "Rethinking SME default prediction: a systematic literature review and future perspectives," Scientometrics, Springer;Akadémiai Kiadó, vol. 126(3), pages 2141-2188, March.
    3. Khan, Abdullah & Rizvi, Syed Aun R. & Ali, Mohsin & Haroon, Omair, 2021. "A survey of Islamic finance research – Influences and influencers," Pacific-Basin Finance Journal, Elsevier, vol. 69(C).
    4. Disli, Mustafa & Aysan, Ahmet F. & Abdelsalam, Omneya, 2023. "Favoring the small and the plenty: Islamic banking for MSMEs," Economic Systems, Elsevier, vol. 47(1).
    5. M. Kabir Hassan & Md Nurul Islam Sohel & Tonmoy Choudhury & Mamunur Rashid, 2024. "A systematic literature review of risks in Islamic banking system: research agenda and future research directions," Risk Management, Palgrave Macmillan, vol. 26(1), pages 1-29, February.
    6. Tamy Al-Binali & Ahmet Faruk Aysan & Hasan Dinçer & Ibrahim Musa Unal & Serhat Yüksel, 2023. "New Horizons in Bank Mergers: A Quantum Spherical Fuzzy Decision-Making Framework for Analyzing Islamic and Conventional Bank Mergers and Enhancing Resilience," Sustainability, MDPI, vol. 15(10), pages 1-37, May.
    7. Md Din Islam Miah & Rosalan Ali & Norhanim Mat Sari, 2023. "Challenges and Solutions for Mudarabah as the Prime Investment Tool of Islamic Financing: A Literature Review," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(9), pages 2168-2185, September.
    8. Ahmet Faruk Aysan & Ibrahim Musa Unal, 2021. "Is Islamic Finance Evolving Into Fintech and Blockchain: A Bibliometric Analysis," Post-Print hal-03351153, HAL.

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    More about this item

    Keywords

    Small business lending; Non-performing loans; Islamic banks;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G3 - Financial Economics - - Corporate Finance and Governance

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