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Relationship Banking, Collateral, and the Economic Crisis as Determinants of Credit Risk: An Empirical Investigation of SMEs

Author

Listed:
  • Krasniqi Besnik A.

    (PhD, University of Prishtina, Faculty of Economy & Kosovo Academy of Sciences and Arts, Republic of Kosovo)

  • Kotorri Mrika

    (PhD, University of Prishtina, Faculty of Economy, Agim Ramadani St, p.n. Prishtinë, 10000, Republic of Kosovo)

  • Aliu Florin

    (PhD, School of Expertness and Valuation, Institute of Technology and Business, Ceske Budejovice, Czech Republic)

Abstract

This study examines the impact of relationship banking and collateral on the probability of firm loan default in Kosovo. Using a sample of 2,320 loan-level data from an individual bank credit register, findings indicate that stronger firm-bank relationships reduce the probability of default, and tighter credit policies regarding higher collateral requirements and interest rates have the opposite effect. Re-specifying the model to control for the banking sector concentration Hirschman-Herfindahl Index (HHI) and the Net Interest Margin (NIM), the firm-bank relationship is no longer statistically significant. Results show that the crisis negatively impacts credit risk, while HHI positively affects the probability of loan default. This evidence suggests that banking relationship matters only in competitive markets. To test the potential interaction effect between relationship banking and collateral, Fairlie’s (1999) decomposition technique is deployed. Our results imply that high concentration levels in the banking sector render firm-bank relationships relatively less important. This is of utmost importance for SMEs, banks, and policymakers.

Suggested Citation

  • Krasniqi Besnik A. & Kotorri Mrika & Aliu Florin, 2023. "Relationship Banking, Collateral, and the Economic Crisis as Determinants of Credit Risk: An Empirical Investigation of SMEs," South East European Journal of Economics and Business, Sciendo, vol. 18(2), pages 49-62, December.
    • Handle: RePEc:vrs:seejeb:v:18:y:2023:i:2:p:49-62:n:7
    DOI: 10.2478/jeb-2023-0018
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    More about this item

    Keywords

    SMEs; asymmetric information; banks; collateral; debt maturity; economic crises; relationship lending; banking market concentration;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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