Relationship lending and small and medium enterprise finance
: an empirical investigation

Student thesis: Doctoral ThesisDoctor of Philosophy


Extant literature on financial intermediation underlines the importance of relationship lending in easing financing challenges that are faced by Small and Medium Enterprises (SMEs) in the credit market. SMEs tend to be opaque and often suffer from a lack of available data which can range from not having audited accounts to the lack of pledgable collateral. Due to this opaqueness, banks are often reluctant to fund SMEs. Correspondingly, SMEs not only report accessibility to and cost of finance as a significant impediment when compared to large firms, but these factors limit their growth potential and innovative ability (Schiffer and Weder, 2001; IADB, 2004; Beck, Demirgüç-Kunt, and Maksimovic, 2005; Beck, Demirgüç-Kunt, Laeven, and Maksimovic, 2006). Due to the information challenges faced by banks in lending to SMEs they often rely on developing strong ties with SMEs through which they obtain proprietary information about firms through repeated transactions across time. However, to date very little evidence exists on the role relationship lending plays in the SME credit market of countries with limited levels of financial development. This research aims to contribute to this gap in the literature through three papers studying interrelated questions using primary data from Bangladesh and for this I designed and implemented two surveys: a firm-level survey of 986 firms and a bank survey of 56 banks.

The first paper attempts to understand how proxies of bank-firm ties are related to the cost of credit measured in terms of interest rate and collateral. The second paper examines the factors which shape the strength of these bank-firm ties, and specifically, how local banking competition in the district where the borrower is based is associated with the relationship orientation of banks. Having established the impact of bank-firm relationship on credit contract terms and how banking competition impacts relationship orientation of banks, the final paper analyses the role relationship lending plays in firm-level innovation and the channel through which relationship lending is linked to innovation. A detailed overview of the three papers is as follows.
Date of Award1 Dec 2019
Original languageEnglish
Awarding Institution
  • King's College London
SupervisorSunil Kumar (Supervisor)

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