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SME's lending and Islamic finance. Is it a "win-win" situation?

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journal contribution
posted on 2018-08-16, 15:41 authored by Mohamed Shaban, Meryem Duygun, John Fry
Information asymmetry is a common feature that hinders lending to small and medium enterprises (SMEs). In the last decade, the growth in Islamic banks lending to SMEs was overwhelming to the extent that it prompted practitioners to regard this as a "win-win" situation. Unlike a conventional bank that mainly resorts to relationship banking to SMEs, an Islamic bank uses a Murabaha contract that creates a "collateral-by-contract" to the borrower. Such distinct lending approaches by the two types of banks have an implication on banks' cost curves that arise from differences in monitoring cost. In this article, we develop a two-stage competition model to investigate the growth in SMEs lending by Islamic banks. In our theoretical model Islamic and conventional banks compete with prices at the first stage (Bertrand framework) and with loan output at the second stage (Cournot framework). Our results reveal that in price competition an Islamic bank will gain market share initially due to its differentiated product. However, in the second stage, the amount of lending to SMEs by Islamic banks decreases due to market share competition.

History

Citation

Economic Modelling, 2016, 55, pp. 1-5

Author affiliation

/Organisation/COLLEGE OF SOCIAL SCIENCES, ARTS AND HUMANITIES/School of Business

Version

  • AM (Accepted Manuscript)

Published in

Economic Modelling

Publisher

Elsevier

issn

0264-9993

Acceptance date

2016-01-30

Copyright date

2016

Available date

2018-08-16

Publisher version

https://www.sciencedirect.com/science/article/pii/S0264999316300116?via=ihub

Language

en

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