Loan portfolio structure: the impact of foreign and Islamic banks

Abstract

PurposeThis study aims to investigate the role of bank ownership (foreign versus domestic) and the type of service (Islamic versus conventional) on bank lending to large enterprises and small and medium enterprises (SMEs).Design/methodology/approachBased on previous literature, the study proposes that foreign banks lend more to large enterprises and less to SMEs than domestic banks do. It also proposes that Islamic banks lend more to SMEs than conventional banks do. It utilizes unique hand-collected data of Jordanian banks from 2007 to 2018 to carry out its investigation. It applies regression estimation methods and propensity score matching to test its hypotheses.FindingsConsistent with prior empirical evidence, the findings show that foreign banks lend significantly less (more) to SMEs (large enterprises) than their domestic counterparts. However, the findings indicate that Islamic banks lend significantly less to SMEs than their conventional counterparts. Further analysis shows that Islamic banks operating in Jordan are ultimately owned by foreign investors hence their incentives to adopt full features of Islamic financial instruments are confounded by their incentives to utilize transaction lending technologies which in turn attenuates the expected positive impact of Islamic banking services on SMEs finance.Originality/valueThis research provides novel evidence on the impact of Islamic banks on SMEs finance as the results suggest that the success of Islamic finance in bridging the gap of SMEs finance is conditional on embracing its full features.