Small business lending and credit risk: Granger causality evidence

Ahmet Faruk Aysan; Mustafa Disli

doi:10.1016/j.econmod.2019.02.014

Small business lending and credit risk: Granger causality evidence

Ahmet Faruk Aysan^*, Mustafa Disli

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

20 Citations (Scopus)

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.

Original language	English
Pages (from-to)	245-255
Number of pages	11
Journal	Economic Modelling
Volume	83
DOIs	https://doi.org/10.1016/j.econmod.2019.02.014
Publication status	Published - Dec 2019
Externally published	Yes

Keywords

Islamic banks
Non-performing loans
Small business lending

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10.1016/j.econmod.2019.02.014

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title = "Small business lending and credit risk: Granger causality evidence",

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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year = "2019",

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T1 - Small business lending and credit risk

T2 - Granger causality evidence

AU - Aysan, Ahmet Faruk

AU - Disli, Mustafa

PY - 2019/12

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N2 - 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.

AB - 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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KW - Non-performing loans

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Small business lending and credit risk: Granger causality evidence

Abstract

Keywords

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