Bank size, relationship lending and SME financing: Evidence from Bangladesh

Abstract

This paper examines the effect of bank size on relationship lending and how relationship lending can affect credit availability, interest rates and collateral to SMEs in the context of Bangladesh. Our empirical results suggest that SMEs with a long-term relationship with small banks have more access to finance than from large banks. However, we did not find any evidence that long-term relationship with small banks can reduce interest rates or collateral requirements for SMEs. We find evidence though that a stronger and much more exclusive relationship with a small bank can reduce the interest rates for SMEs. This mixed evidence suggests that small banks do not have full comparative advantage in processing soft information, but large banks in Bangladesh may have different lending techniques to extend loans to SMEs with similar interest rates and collateral requirements as like as small banks. Furthermore, we find evidence that small banks are giving priority to both long-term relationship and collateral requirement for SME credit risk than large banks. © Ashiqur Rahman, M. Twyeafur Rahman, Aleksandr Kljucnikov, 2016.