Lending relationship, small businesses and NPLs in Tunisia

ABSTRACT The banking system in Tunisia suffers from non-performing loans, fuelling the aversion of banks to credit risk and hindering the financing of SMEs. The research question tackles the ‘transactional lending’ versus ‘relational lending’ relationship between a sample of 10 Tunisian banks observed over 2005–2017 and its clients, and its impact on non-performing loans. The econometric analysis first tests a linear model between non-performing loans and the determinants (Size, Ownership and Proximity) of the lending relationship, which suggests that banks are poorly committed in collecting soft information from their clients. Second, the estimation of a (conditional) threshold effect in a non-linear model between these main determinants, distinguishes two regimes, one above and one below the threshold. Three robust outcomes emerge, the (large) size of most banks in the sample constitutes a barrier to meeting loan applications from SMEs, and enhancing tighter customer relationship with a higher number of branches as well as foreign participation in the share capital of these banks would enable to meet these demands.