Favoring the small and the plenty: Islamic banking for MSMEs

While MSMEs form the backbone of many countries, most of them suffer from limited access to finance. We extend the literature by examining whether Islamic banks, compared to their conventional peers, favor more the MSMEs credit market segment in Turkey. We do this by considering various aspects of the lending behavior towards MSMEs (total lending, foreign currency lending, loan commitments, loan quality, and revenues) across different MSMEs size categories (micro, small and medium-sized firms). Our results show that once we control for bank-specific characteristics, we find that Islamic banks are more engaged with MSME financing and generate more revenues from servicing MSMEs. Concerning the quality of the MSME lending portfolio, no distinguishable patterns were observed between Islamic and conventional banks.