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<p>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.</p>
</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.

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

PhD, University of Prishtina, Faculty of Economy

South East European Journal of Economics and Business

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

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...

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

Published Online: Dec 10, 2023

Page range: 49 - 62

DOI: https://doi.org/10.2478/jeb-2023-0018

Keywords
SMEs, asymmetric information, banks, collateral, debt maturity, economic crises, relationship lending, banking market concentration

© 2023 Besnik A. Krasniqi et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

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

Published Online: Dec 10, 2023

Page range: 49 - 62

DOI: https://doi.org/10.2478/jeb-2023-0018

KeywordsSMEs, asymmetric information, banks, collateral, debt maturity, economic crises, relationship lending, banking market concentration

© 2023 Besnik A. Krasniqi et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Keywords
SMEs, asymmetric information, banks, collateral, debt maturity, economic crises, relationship lending, banking market concentration