Financing Attitude of Islamic and Conventional Banking Institutions towards Small and Medium-Sized Enterprises (SMEs) in Pakistan
Keywords:
Commercial Banks, Financing Attitude, Islamic Banking Institutions, Small and Medium Sized Enterprises (SMEs), State Bank of Pakistan (The Central Bank)
Abstract
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Purpose: The current study attempted to investigate the banks’ financing attitude towards Small and Medium-Sized Enterprises (SMEs) in Pakistan. The study further aimed to determine the difference in financing attitude between Islamic and conventional banks.
Design/Methodology/Approach: The quarterly data was collected from the State Bank of Pakistan’s (SBP’s) website (the Central Bank of Pakistan). Moreover, regression analysis was applied to contrast the attitude of Islamic and conventional banking institutions in Pakistan towards SMEs financing.
Findings: The evidence suggested that Islamic banking institutions are more inclined towards financing SMEs as compared to their conventional counterparts. However, overall, the results were weakly significant at 10% level.
Research Limitations/Implications: The current study examined the attitude of the type of banks towards SME financing and compared Islamic financial institutions with conventional ones. However, SMEs outstanding financing data by individual financial institutions was not available, which could, if available, help to understand lending attitudes at a bank level.
Originality/Value: To the best of authors’ knowledge, no study has discussed and compared financing attitudes of Islamic and conventional banking institutions towards SMEs in Pakistan so far. Therefore, the current study attempted to fill this gap by contributing to the extant literature on financing to SMEs. Moreover it also added new dimensions and as per the authors’ knowledge, it was the first research conducted on banking-type level in Pakistani context.
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References
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Indarti, N., & Langenberg, M. (2004). Factors affecting business success among SMEs: Empirical evidences from Indonesia. Journal of Asia Entrepreneurship and Sustainability, 3(2), 1-14.
Ipek Erdogan, A. (2019). Determinants of perceived bank financing accessibility for SMEs: evidence from an emerging market. Economic research-Ekonomska istraživanja, 32(1), 690-716. https://doi.org/10.1080/1331677X.2019.1578678
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Al Balushi, Y., Locke, S., & Boulanouar, Z. (2018). Islamic financial decision-making among SMEs in the Sultanate of Oman: An adaption of the theory of planned behaviour. Journal of Behavioral and Experimental Finance, 20, 30-38. https://doi.org/10.1016/j.jbef.2018.06.001
Al Balushi, Y., Locke, S., & Boulanouar, Z. (2019). Determinants of the decision to adopt Islamic finance: evidence from Oman. ISRA International Journal of Islamic Finance, 11(1), 6-26. https://doi.org/10.1108/IJIF-02-2018-0020
Alhassan, A. L., Owusu Brobbey, F., & Effah Asamoah, M. (2013). Does asset quality persist on bank lending behaviour? Empirical evidence from Ghana. Global Journal of Management and Business Research, 13(4), 1-8. https://mpra.ub.uni-muenchen.de/48177/
Anwar, T., & Asaduzzaman, M. (2018). Decision Making Approach and Criteria of SME Financing by Commercial Banks of Bangladesh. International Journal of Business and Tehnopreneurship, 8(3), 321-328.
Arif, M., Hasan, M., Shafique Joyo, A., Gan, C., & Abidin, S. (2020). Formal finance usage and innovative SMEs: Evidence from ASEAN countries. Journal of Risk and Financial Management, 13(10), 1-19. https://doi.org/10.3390/jrfm13100222
Aysan, A. F., Disli, M., Ng, A., & Ozturk, H. (2016). Is small the new big? Islamic banking for SMEs in Turkey. Economic Modelling, 54, 187-194. https://doi.org/10.1016/j.econmod.2015.12.031
Ayub, H., & Javeed, A. (2016). Impact and implications of capital adequacy ratio on the financing behaviour: Evidence from Islamic banks in Pakistan. Journal of Islamic Business and Management Vol, 6(1), 19-40.
Beck, T. (2007, April). Financing constraints of SMEs in developing countries: Evidence, determinants and solutions. In Financing innovation-oriented businesses to promote entrepreneurship, 1-36.
Beck, T., & Demirguc-Kunt, A. (2006). Small and medium-size enterprises: Access to finance as growth constraint. Journal of Banking & Finance, 30(11), 2931-2943. https://doi.org/10.1016/j.jbankfin.2006.05.009
Beck, T., Demirgüç-Kunt, A., & Pería, M. S. M. (2011). Bank financing for SMEs: Evidence across countries and bank ownership types. Journal of Financial Services Research, 39(1-2), 35-54. https://doi.org/10.1007/s10693-010-0085-4
Bhalla, A., & Kaur, M. (2012). SMEs’ access to finance: an analysis of attitude and decision-making criteria of commercial banks. Asia-Pacific Journal of Management Research and Innovation, 8(1), 69-76. https://doi.org/10.1177/2319510X1200800108
Bilal, A. R., Fatima, T., Iqbal, S., & Imran, M. K. (2022). I can see the opportunity that you cannot! A nexus between individual entrepreneurial orientation, alertness, and access to finance. European Business Review, 34(4), 556-577. https://doi.org/10.1108/EBR-08-2021-0186
Bonanomi, M. M., Hall, D. M., Staub-French, S., Tucker, A., & Talamo, C. M. L. (2019). The impact of digital transformation on formal and informal organizational structures of large architecture and engineering firms. Engineering, Construction and Architectural Management, 27(4), 872-892. https://doi.org/10.1108/ECAM-03-2019-0119
Bruns, V., & Fletcher, M. (2008). Banks' risk assessment of Swedish SMEs. Venture Capital, 10(2), 171-194. https://doi.org/10.1080/13691060801946089
Bundesbank, D. (2018). The importance of bank profitability and bank capital for monetary policy. Monthly Report, 70(1), 27-52.
Cook, P., & Nixson, F. (2000). Finance and small and medium-sized enterprise development. Working Paper Series No. 14, Manchester Institute for Development Policy and Management, University of Manchester.
Dar, M. S., Ahmed, S., & Raziq, A. (2017). Small and medium-size enterprises in Pakistan: Definition and critical issues. Pakistan Business Review, 19(1), 46-70.
De la Torre, A., Peria, M. S. M., & Schmukler, S. L. (2010). Bank involvement with SMEs: Beyond relationship lending. Journal of Banking & Finance, 34(9), 2280-2293. https://doi.org/10.1016/j.jbankfin.2010.02.014
Fatoki, O. O., & Smit, A. V. A. (2011). Constraints to credit access by new SMEs in South Africa: A supply-side analysis. African Journal of Business Management, 5(4), 1413-1425. DOI: 10.5897/AJBM10.1335
Fraser, S. (2004). Finance for Small and Medium-Sized enterprises. A Report on the 2004 UK Survey of SME Finances, Centre for Small and Medium-Sized Enterprises. Warwick Business School, Warwick University, Coventry.
Hennink, M., Hutter, I., & Bailey, A. (2020). Qualitative research methods. Sage Publishers, USA.
Hussain D. (2018). Small Enterprises, big problem. DAWN.COM. Retrieved July 31, 2020, from https://www.dawn.com/NEWS/1396098.
Ihsaan Afzal Khan (2020), The woes of the private sector borrower, Retrieved August 31, 2020, from https://www.pakistantoday.com.pk/2020/05/18/woes-private-sector-borrower/.
Ilyas, S. (2019). Banks’ Lending Preferences and SME Credit in Pakistan: Experience and Way Forward. International Journal of Advanced Economics, 1(1), 18-30. https://doi.org/10.51594/ijae.v1i1.43
Indarti, N., & Langenberg, M. (2004). Factors affecting business success among SMEs: Empirical evidences from Indonesia. Journal of Asia Entrepreneurship and Sustainability, 3(2), 1-14.
Ipek Erdogan, A. (2019). Determinants of perceived bank financing accessibility for SMEs: evidence from an emerging market. Economic research-Ekonomska istraživanja, 32(1), 690-716. https://doi.org/10.1080/1331677X.2019.1578678
Isa, M. A. M., Latif, R. A., Zaharum, Z., Nasrul, F., & Noh, M. K. A. (2019). Internal factors influencing commercial bank’s lending behaviour in Malaysia. Advanced International Journal of Banking, Accounting and Finance, 1(1), 48-58. DOI: 10.35631/aijbaf.11005
Janjua, A. A., Hayat, M. A., & Aslam, M. (2018). How Does Lending from Commercial Banks Impact Performance of Small Enterprises: A Case Study of District Hafizabad, Pakistan. Journal of Economic and Social Studies, 8(1), 1-14. http://dx.doi.org/10.14706/JECO
Karamat, J., Shurong, T., Waheed, A., & Mahmood, N. (2016). Bank financing for SMEs in Pakistan. Joint International Information Technology, Mechanical and Electronic Engineering Conference, 422-425. Atlantis Press.
Khalique, M., Bontis, N., Shaari, J. A. N., & Isa, A. H. M. (2015). Intellectual Capital in Small and Medium Enterprises in Pakistan. Journal of Intellectual Capital. 16(1), 224-238. https://doi.org/10.1108/JIC-01-2014-0014
Khan, M. A. (2022). Barriers constraining the growth of and potential solutions for emerging entrepreneurial SMEs. Asia Pacific Journal of Innovation and Entrepreneurship, 16(1), 38-50. https://doi.org/10.1108/APJIE-01-2022-0002
Khan, M. A., Kamal, S., & Khan, I. U. (2020). Analyzing the Inhibitors of MSMES’ Access to Banks’ Financing: Evidence from Khyber Pakhtunkhwa, Pakistan. Sir Syed Journal of Education & Social Research, 3(2), 160-167. https://doi.org/10.36902/sjesr-vol3-iss2-2020(160-167)
Khan, M. M. (2015). Sources of finance available for SME sector in Pakistan. International Letters of Social and Humanistic Sciences, 47, 184-194. https://www.learntechlib.org/p/176960/
Kijkasiwat, P. (2021). The influence of behavioral factors on SMES’ owners intention to adopt private finance. Journal of Behavioral and Experimental Finance, 30, 1-6. https://doi.org/10.1016/j.jbef.2021.100476
Kouser, R., Durani, A., Hussain, F. Z., & Hassan, M. (2012). Investigation of banker’s lending criteria to SMEs and assessment thereof. International Research Journal of Finance and Economics, 4(89), 158-186.
Lajuni, N., Wong, W. P. M., Yacob, Y., Ting, H., & Jausin, A. (2017). Intention to use Islamic banking products and its determinants. International Journal of Economics and Financial Issues, 7(1), 329-333.
Li, H., Meng, L., Wang, Q., & Zhou, L. A. (2008). Political connections, financing and firm performance: Evidence from Chinese private firms. Journal of Development Economics, 87(2), 283-299. https://doi.org/10.1016/j.jdeveco.2007.03.001
Liedholm, C., McPherson, M., & Chuta, E. (1994). Small enterprise employment growth in rural Africa. American Journal of Agricultural Economics, 76(5), 1177-1182. https://doi.org/10.2307/1243413
Manzoor, F., Wei, L., & Siraj, M. (2021). Small and medium-sized enterprises and economic growth in Pakistan: An ARDL bounds cointegration approach. Heliyon, 7(2), 1-8. https://doi.org/10.1016/j.heliyon.2021.e06340
Muhmad, S. N., Wan Ismai, W. N. S., A Rahim, N. A. A., & Ahmad, S. N. (2020). Islamic financing for small medium enterprises: Challenges and opportunities. Global Business Management Review, 12(2), 50-64. https://doi.org/10.32890/gbmr2020.12.2.4
Nadeem, T., & Rasool, R. (2018). Marketing: The crucial success factor for Pakistan's credit guarantee scheme (No. 909). Asian Development Bank Institute Working Paper Series.
Ndemi, E. G., & Mungai, J. (2018). Formal credit financing and financial performance of small and medium enterprises in Nanyuki town, Kenya. International Academic Journal of Economics and Finance, 3(2), 179-196. http://www.iajournals.org/articles/iajef_v3_i2_179_196.pdf
North, D., Baldock, R., & Ekanem, I. (2010). Is there a debt finance gap relating to Scottish SMEs? A demand-side perspective. Venture Capital, 12(3), 173-192. https://doi.org/10.1080/13691061003658670
Okahara, N. (2020). Liquidity requirement and banks' lending. Working Paper No. 101816, Online at https://mpra.ub.uni-muenchen.de/101816/
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Published
2023-12-26
How to Cite
Sharif, S., & Baig, M. A. M. (2023). Financing Attitude of Islamic and Conventional Banking Institutions towards Small and Medium-Sized Enterprises (SMEs) in Pakistan. Islamic Banking and Finance Review, 10(2), 1-30. Retrieved from https://journals.umt.edu.pk/index.php/IBFR/article/view/4854
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Articles
Copyright (c) 2023 Saqib Sharif, Mirza Abdul Mateen Baig
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