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Title: SME's lending and Islamic finance. Is it a "win-win" situation?
Authors: Shaban, Mohamed
Duygun, Meryem
Fry, John
First Published: 27-Feb-2016
Publisher: Elsevier
Citation: Economic Modelling, 2016, 55, pp. 1-5
Abstract: 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.
DOI Link: 10.1016/j.econmod.2016.01.029
ISSN: 0264-9993
Version: Post-print
Status: Peer-reviewed
Type: Journal Article
Rights: Copyright © Elsevier 2016. This version of the paper is an open-access article distributed under the terms of the Creative Commons Attribution-Non Commercial-No Derivatives License (, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.
Appears in Collections:Published Articles, Dept. of Economics

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