TAILIEUCHUNG - Does relationship lending promote growth? Savings banks and SME financing

Members of the diaspora residing abroad are able to apply for and obtain small transnational loans in their countries of origin from banks or microfinance lenders. Financial institutions issue transnational loans for business expansion, home improvement, home purchase, and education expenses, but have found mortgage lending to be most successful. By obtaining transnational loans, migrants living abroad are able to provide credit to family members back home. In general, migrants cannot use assets that they possess abroad as collateral for transnational loans due to differences in bankruptcy laws and enforcement between countries | Does relationship lending promote growth Savings banks and SME financing Constantin F. Slottyz y Goethe University Frankfurt House of Finance Germany First Draft January 2009. This Version April 2009 Abstract This paper addresses the question whether close borrower-lender relationships so called hausbank-relationships facilitate the funding and beneficial development of SME. To this end we derive a model which relates a firm s growth rate to its need for external funds and subsequently compute the firms that exceed their predicted growth rate. We then use this measure to identify specific characteristics that are associated with long- and short-term financing of firm growth in particular the influence of relationship lending. We find that close ties with savings banks predict firms access to external finance to fund growth. Moreover the long-term liabilities of firms with hausbank-relationships almost double those with multiple relationships while the overall leverage is about the same. In turn we find an strong empirical relationship between the provision of long-term funds and firm growth. Keywords Small business lending credit access public banks JEL Codes G21 D21 This research paper is part of a project funded by the German Savings Bank Association. The expressed opinions are strictly those of the author and do not necessarily reflect those of the affiliated organizations. zGoethe University Frankfurt House of Finance Email slotty@ yI thank Michael Koetter for helpful discussion. Electronic copy available at http abstract 1376251 1 Introduction We aim to provide empirical evidence on the apparent conundrum regarding public bank s contribution to the performance of small and medium enterprises SME . Specifically we test one of the main reasons put forward by savings banks in respect to their beneficial impact on the business landscape in a developed economy do German savings banks facilitate the funding and beneficial development

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