IDEAS home Printed from https://ideas.repec.org/a/kap/sbusec/v27y2006i2p127-137.html
   My bibliography  Save this article

‘Relationship Banking and SMEs: A Theoretical Analysis’

Author

Listed:
  • Timo Baas
  • Mechthild Schrooten

Abstract

Reliable information on small- and medium-sized enterprises (SMEs) is rare and costly for financial intermediaries. Therefore relationship banking is often considered as the appropriate lending technique. In this paper we offer a theoretical model to analyze relationship banking and the pricing behavior of banks in a Bertrand competition framework with monitoring costs. We show that the lack of reliable information leads to comparable high interest rates even if a long-term relationship between borrower and bank exists. The paper offers a theoretical explanation why SMEs often are faced with borrowing constraints. Copyright Springer 2006

Suggested Citation

  • Timo Baas & Mechthild Schrooten, 2006. "‘Relationship Banking and SMEs: A Theoretical Analysis’," Small Business Economics, Springer, vol. 27(2), pages 127-137, October.
    • Handle: RePEc:kap:sbusec:v:27:y:2006:i:2:p:127-137
    DOI: 10.1007/s11187-006-0018-7
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11187-006-0018-7
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11187-006-0018-7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Thorsten Beck, 2003. "Small and medium enterprises, growth, and poverty : cross-country evidence," Policy Research Working Paper Series 3178, The World Bank.
    2. Frédérique Bracoud, 2002. "Sequential Models of Bertrand Competition for Deposits and Loans under Asymmetric Information," Keele Economics Research Papers KERP 2002/15, Centre for Economic Research, Keele University.
    3. Esther Gal-or, 1986. "Information Transmission—Cournot and Bertrand Equilibria," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(1), pages 85-92.
    4. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August.
    5. Lummer, Scott L. & McConnell, John J., 1989. "Further evidence on the bank lending process and the capital-market response to bank loan agreements," Journal of Financial Economics, Elsevier, vol. 25(1), pages 99-122, November.
    6. Beck, Thorsten & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2004. "Bank Competition and Access to Finance: International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 627-648, June.
    7. Arnoud W. A. Boot & Todd T. Milbourn & Anjolein Schmeits, 2006. "Credit Ratings as Coordination Mechanisms," The Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 81-118.
    8. Frame, W Scott & Srinivasan, Aruna & Woosley, Lynn, 2001. "The Effect of Credit Scoring on Small-Business Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 813-825, August.
    9. Wagenvoort, Rien, 2003. "Are finance constraints hindering the growth of SMEs in Europe?," EIB Papers 7/2003, European Investment Bank, Economics Department.
    10. John H. Boyd & Edward C. Prescott, 1986. "Dynamic coalitions, growth, and the firm," Staff Report 100, Federal Reserve Bank of Minneapolis.
    11. Diamond, Douglas W & Verrecchia, Robert E, 1991. "Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-1359, September.
    12. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-381, July.
    13. Mitchell A. Petersen & Raghuram G. Rajan, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(2), pages 407-443.
    14. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    15. Allen N. Berger & Gregory F. Udell, 2002. "Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure," Economic Journal, Royal Economic Society, vol. 112(477), pages 32-53, February.
    16. Allen, Linda & Saunders, Anthony & Udell, Gregory F., 1991. "The pricing of retail deposits: Concentration and information," Journal of Financial Intermediation, Elsevier, vol. 1(4), pages 335-361, December.
    17. Ram T. S. Ramakrishnan & Anjan V. Thakor, 1984. "Information Reliability and a Theory of Financial Intermediation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 415-432.
    18. Giovanni Dell'Ariccia & Ezra Friedman & Robert Marquez, 1999. "Adverse Selection as a Barrier to Entry in the Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 515-534, Autumn.
    19. Rajan, Raghuram & Winton, Andrew, 1995. "Covenants and Collateral as Incentives to Monitor," Journal of Finance, American Finance Association, vol. 50(4), pages 1113-1146, September.
    20. Allen, Beth & Hellwig, Martin, 1993. "Bertrand-Edgeworth Duopoly with Proportional Residual Demand," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 39-60, February.
    21. Boot, Arnoud W. A & Schmeits, Anjolein, 1998. "Challenges to competitive banking: a theoretical perspective," Research in Economics, Elsevier, vol. 52(3), pages 255-270, September.
    22. Boot, Arnoud W A & Thakor, Anjan V, 1994. "Moral Hazard and Secured Lending in an Infinitely Repeated Credit Market Game," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 899-920, November.
    23. Harrington, Joseph Jr., 1989. "A re-evaluation of perfect competition as the solution to the Bertrand price game," Mathematical Social Sciences, Elsevier, vol. 17(3), pages 315-328, June.
    24. Berger, Allen N. & Bonime, Seth D. & Covitz, Daniel M. & Hancock, Diana, 2000. "Why are bank profits so persistent? The roles of product market competition, informational opacity, and regional/macroeconomic shocks," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1203-1235, July.
    25. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    26. Slovin, Myron B & Sushka, Marie E & Polonchek, John A, 1993. "The Value of Bank Durability: Borrowers as Bank Stakeholders," Journal of Finance, American Finance Association, vol. 48(1), pages 247-266, March.
    27. Jun, Byoung & Vives, Xavier, 2004. "Strategic incentives in dynamic duopoly," Journal of Economic Theory, Elsevier, vol. 116(2), pages 249-281, June.
    28. Beck, Thorsten & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2002. "Financial and legal constraints to firm growth - Does size matter?," Policy Research Working Paper Series 2784, The World Bank.
    29. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
    30. Steven A. Sharpe, 1990. "Switching costs, market concentration, and prices: the theory and its empirical implications in the bank deposit market," Finance and Economics Discussion Series 138, Board of Governors of the Federal Reserve System (U.S.).
    31. Allen Berger, 2006. "Potential Competitive Effects of Basel II on Banks in SME Credit Markets in the United States," Journal of Financial Services Research, Springer;Western Finance Association, vol. 29(1), pages 5-36, February.
    32. Rajan, Raghuram G, 1992. "Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-1400, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August.
    2. Manoj Athavale & Robert O. Edmister, 2004. "The Pricing of Sequential Bank Loans," The Financial Review, Eastern Finance Association, vol. 39(2), pages 231-253, May.
    3. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
    4. Hans Degryse & Steven Ongena, 2002. "Bank-Firm Relationships and International Banking Markets," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 9(3), pages 401-417.
    5. Elyasiani, Elyas & Goldberg, Lawrence G., 2004. "Relationship lending: a survey of the literature," Journal of Economics and Business, Elsevier, vol. 56(4), pages 315-330.
    6. Kirschenmann, K., 2010. "The Dynamics in Requested and Granted Loan Terms when Bank and Borrower Interact Repeatedly," Other publications TiSEM 40d5005c-1626-4511-aa8a-f, Tilburg University, School of Economics and Management.
    7. Udell, Gregory F., 2008. "What's in a relationship The case of commercial lending," Business Horizons, Elsevier, vol. 51(2), pages 93-103.
    8. Gorton, Gary & Winton, Andrew, 2003. "Financial intermediation," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 8, pages 431-552, Elsevier.
    9. Santikian, Lori, 2014. "The ties that bind: Bank relationships and small business lending," Journal of Financial Intermediation, Elsevier, vol. 23(2), pages 177-213.
    10. Kirschenmann, K., 2010. "The Dynamics in Requested and Granted Loan Terms when Bank and Borrower Interact Repeatedly," Other publications TiSEM 300df022-4701-4773-a8b7-c, Tilburg University, School of Economics and Management.
    11. Kirschenmann, K., 2010. "The Dynamics in Requested and Granted Loan Terms when Bank and Borrower Interact Repeatedly," Discussion Paper 2010-63, Tilburg University, Center for Economic Research.
    12. Berger, Allen N. & Klapper, Leora F. & Martinez Peria, Maria Soledad & Zaidi, Rida, 2008. "Bank ownership type and banking relationships," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 37-62, January.
    13. Karlyn Mitchell & Douglas K. Pearce, 2004. "Which Loans are Relationship Loans? Evidence from the 1998 Survey of Small Business Finances," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 9(2), pages 1-36, Summer.
    14. Foroughfard, Rasoul & Rahmati, Mohammad, 2019. "The Effect of Relationship Lending on Loan Contract Terms," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 14(2), pages 133-157, April.
    15. Gajewski, Krzysztof & Pawłowska, Małgorzata & Rogowski, Wojciech, 2012. "Relacje firm z bankami w Polsce w świetle danych ze sprawozdawczości bankowej [Bank-firm relationships in Poland in the light of data from bank reporting]," MPRA Paper 42544, University Library of Munich, Germany, revised 29 Oct 2012.
    16. Longhofer, Stanley D. & Santos, Joao A. C., 2000. "The Importance of Bank Seniority for Relationship Lending," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 57-89, January.
    17. Inderst, Roman & Mueller, Holger M., 2007. "A lender-based theory of collateral," Journal of Financial Economics, Elsevier, vol. 84(3), pages 826-859, June.
    18. Annalisa Castelli & Gerald P. Dwyer & Iftekhar Hasan, 2006. "Bank relationships and small firms’ financial performance," FRB Atlanta Working Paper 2006-05, Federal Reserve Bank of Atlanta.
    19. Ferri, Giovanni & Murro, Pierluigi, 2015. "Do firm–bank ‘odd couples’ exacerbate credit rationing?," Journal of Financial Intermediation, Elsevier, vol. 24(2), pages 231-251.
    20. Berger, Allen N. & Klapper, Leora F. & Udell, Gregory F., 2001. "The ability of banks to lend to informationally opaque small businesses," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2127-2167, December.

    More about this item

    Keywords

    accounting; financial constraints; relationship banking; small and medium sized enterprises; D43; D82; G21; M41;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:sbusec:v:27:y:2006:i:2:p:127-137. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.