Relationship Banking Research Articles

Challenges faced by financial institutes before onboarding politically exposed persons in undocumented Eastern economies: a case study of Pakistan

PurposeThis study aims to evaluate and investigate the existing process of establishing a banking relationship with politically exposed persons.Design/methodology/approachThis study used qualitative techniques of semi-structured interviews with senior compliance officers of financial institutes in Pakistan.FindingsThis study found that the existing mechanism of identification and verification of politically exposed persons (PEPs) is ineffective. Financial institutes face challenges like the quality of name screening data sets, cost of identification and verification, role and control of the regulator, the influence of politically exposed persons, the opaqueness of laws and international connections of the politically exposed persons. Further, financial Institutes are burdened by regulators to perform robust PEP customer due diligence but do not guide and provide the right tools.Originality/valueThis paper aims to find challenges faced by financial institutes before onboarding the PEPs. Further, very limited studies on this topic have been conducted in Pakistani context.

Impact of banking relationships and ownership concentration on corporate cash holdings in India

PurposeThis study aims to investigate the impact of banking relationships and ownership concentration on corporate cash holdings (CCH) in 333 Indian micro, small and medium-sized enterprises (MSMEs) for nine years (2011–2020).Design/methodology/approachThe authors use system generalized method of moments approach to examine the impact of banking relationships and ownership concentration on CCH.FindingsThe paper finds that the firm's number of banking relationships share a concave (inverted U-shaped) relationship with the cash holding levels. Initially, the positive relationship may signal weak creditworthiness of MSMEs or be a consequence of bank free-rider monitoring issues. The negative effect after a certain level shows that the competition among banks reduces the firm's financial constraints and therefore makes the firms hoard less cash. The authors also document an inverse relationship between ownership concentration and cash holdings. The authors' results suggest that the presence of large shareholders acts as efficient monitors, reducing the risk of potential agency conflicts and thereby managerial entrenchment resulting in lower cash levels. This association remains unchanged for MSMEs in the service sector. However, the quadratic association between banking relationships and CCH vanishes in the presence of a service sector dummy in the regression model. The authors find a significant positive linear relationship in this regard.Originality/valueTo the best of the authors' knowledge, this is the first paper that studies banking relationships and ownership concentration as determinants of Indian MSMEs.

Blockchain and Inter Planetary File System based Secured KYC Document Verification for Banking System

Know your client (KYC) is a requirement for the banking system to validate a customer using identity, appropriateness, and risk assessment in establishing a banking relationship. With the developed concern for security, the KYC process is complex and involves a high cost for completing for a single customer. In this paper, we propose a reasonable, abrupt, secure, and transparent platform for KYC document verification for the Banking system through Inter Planetary File System (IPFS) and blockchain technology. The proposed system allows a customer to open an account at any Bank, complete the KYC process there, generate a hash value using the IPFS network and share it with other banks using the blockchain technique. Using a private key, any Bank/financial organization can retrieve, and store customer data (i.e., KYC) securely using the IPFS network if the customer wants to open another account in that Bank/financial organization. The proposed system can avoid repetitive work and save time, and money during the KYC process when someone tries to open an account at multiple Banks. In this paper, we have focused on how the present banking industry, especially the KYC document verification process, can be impacted after using blockchain to store and track the records.

Neither true nor fairweather friend: relationship banking and SME borrowing under Covid-19

A growing literature addresses the costs and benefits associated with relationship banking, particularly for smaller firms, but with much of this work focused on normal trading conditions. Covid-19 provides an ideal testbed to explore the resilience of relationship banking. We examine whether the presence of closer pre-Covid ties between SMEs and their banks helps in accessing funds in the Covid-19 pandemic period. Then are ties between relationship bankers and SME borrowers a case of ‘true love’ or rather are the parties more akin to ‘fair-weather friends?’ Data from the UK SME Finance Monitor from 2018Q2-2020Q3 is used in this paper to examine this question. Our analysis suggests that relationship banking was important for the acquisition of bank credit pre-Covid-19 but was of limited influence in post-Covid-19 lending behaviour. Banks treated SMEs that had a good relationship with them in the same way as those that did not and with public interventions to support lenders material in this.

PERCEPTION STUDY ON THE EFFECTS OF INTEREST-FREE FINANCING OF ISLAMIC BANKING ON INFORMATION ASYMMETRY AMONG ENTREPRENEURS: EVIDENCE FROM NIGERIA

This study investigates the perception of the relationship between interest-free financing contracts of Islamic banking as an incentive to provide voluntary information disclosure among entrepreneurs in Nigeria thereby reducing the incidence of information asymmetry. Questionnaires were used as an instrument of data collection. Multivariate Logistic Regression Model was employed to estimate the model. The result showed a positive and significant relationship between the incentive of interest-free financing contracts and motivation to give voluntary information disclosure, thereby minimizing the incidence of asymmetric information. Similarly, the finding also indicates that level of education, understanding and awareness of the procedures of obtaining credit facilities from banks (both conventional and non-interest banks) has a significant relationship with the entrepreneurs’ motivation to give voluntary information disclosure to the banks concerning the financing contracts obtained from Islamic banks. However, the religious belief of the entrepreneurs did not indicate a significant relationship with their decisions to have a banking relationship with Islamic banks but was largely motivated by economic factors and business decisions in their relationship with the banks and their motivation to give voluntary information disclosure. This study, unlike most previous studies on Islamic banking in Nigeria, investigates the perception of entrepreneurs of the relationship between the incentive of interest-free financing contracts and motivation to volunteer greater information. The policymakers can, therefore, leverage the positive perception of entrepreneurs of the incentive of interest-free financing, to reduce information asymmetry in Islamic banking, and promote the establishment of more Islamic banks through appropriate legislations and regulations that can ensure enabling operating environment. This would, in turn, promote financial inclusion and reduce the widening funding gap experienced by small and medium enterprises in the country.

Affective and cognitive factors that hinder the banking relationships of economically vulnerable consumers

PurposeThe aim of this paper is to explore the affective and cognitive factors that condition banking relationships for economically vulnerable consumers and how these factors contribute to increasing financial difficulties and exclusion. This research, performed on a set of focus groups, bases its findings on a combination of experimental and discourse analysis methods.Design/methodology/approachFinancial decisions are not rational and can be biased by affective and cognitive factors. Behavioural finance has focused very little on analysing how consumer biases influence relationships with banking institutions. Additionally, these relationships are affected by the digitalization and transformation of banking business. Thus, in the case of economically vulnerable consumers, who are not profitable for the increasingly competitive banking industry and lack financial abilities, their risk of financial exclusion is increasing.FindingsThe results show that distrust and shame lead to financial difficulties in economically vulnerable consumers. Distrust generates problems of access and self-exclusion, while shame generates difficulties of use. This lack of trust makes them more rational when dealing with machines than with people, showing greater banking difficulties for consumers with a “person-suspicious” profile.Originality/valueThis finding can help regulators establish limits on banking behaviour, require banks to incorporate affective and cognitive factors in their convenience tests and detect new variables that can help them improve their insolvency ratios and reputations.

Analysis of the Use of Marketing Tools at the Present Stage of Development of the Market of Banking Services: Foreign Experience and Turkish Practice

Abstract: Currently, the development of the banking system in the world is taking place in a crisis in the financial market and increasing competition between commercial banks. In this regard, the management of banks has a need to review the strategy for the implementation of activities and the tools by which the bank will seek to attract and retain its potential customers. Methods and techniques for managing bank marketing tools proposed by Western experts are somehow connected with the introduction of new methods for the bank's relationship with customers, most of which are based on the use of Internet technologies. An analysis of the experience of using banking marketing tools abroad will improve the competitiveness of Turkish banks in the global banking services market. Keywords: bank, service, marketing, consumer, tool

A tale of two markets: Labor market mobility and bank information sharing

We develop a theory of bank information sharing, highlighting the interactions between credit and labor markets. A better-informed relationship bank competes with a less informed foreign bank for borrowers under asymmetric information about borrowers’ creditworthiness. Credit market competition triggers competition for the relationship bank’s loan officers, who possess valuable information about the borrowers’ creditworthiness. The relationship bank can share credit information to soften the labor market competition, despite intensifying the credit market competition. When labor market mobility is moderate, information sharing emerges as the optimal strategy of the relationship bank.

Operating Leases and Credit Assessments: The Role of Main Banks in Japan

ABSTRACTThis study examines how Japanese banks evaluate off-balance sheet operating leases in their credit assessments. Using a sample of 6,985 firm-year observations in Japan over the period 2001 to 2017, we find that banks in Japan evaluate off-balance sheet operating leases in certain circumstances. First, we find that banks evaluate such leases when firms have a strong relationship with a main bank. Second, banks assess firms' credit risk by evaluating operating leases if there is a strong main bank relationship especially when estimation reliability is low. We uncover robust results by controlling for the systematic characteristics of a strong main bank relationship. Our study thus suggests that the main bank relationship plays the important role of conveying the off-balance sheet operating leases in loan contracts in Japan.

In search of a rational foundation for the massive IT boom in the Australian banking industry: Can the IT boom really drive relationship banking?

Information technology (IT) is meant to improve bank performance by lowering operational costs and improving the process of financial intermediation of banks. However, the empirical evidence has failed to reach a consensus on the precise effects of IT on bank performance as some find evidence to concur with the Solow Paradox, while others contradict this paradox. The heterogeneity in the quality of banking services is partly responsible for the inconsistency in the findings. To sidestep the issue of heterogeneity, we consider the top-tier Australian banks for which the quality of banking services is homogeneous. Applying the dynamic panel data methodology, i.e., panel autoregressive distributed lag (panel ARDL) and cross-sectionally augmented panel ARDL (CS-ARDL) models, we investigate the effect of IT on the cost and profit efficiency frontiers of the top-tier Australian banks during 2000–2019. We unequivocally establish that the frontiers of bank profits rise due to the adoption and diffusion of IT investment, contradicting the assumed failure of IT to adequately collect soft information in the banking industry. Furthermore, we find that the cost frontiers have risen, driven by the IT boom. Hence, there is evidence that despite increases in operational inefficiency, IT has shifted the profit frontiers up by enhancing relationship banking in Australia.

Markups and Financial Shocks

Abstract This paper analyses the impact of financial frictions on markup adjustments at the firm level. We use a rich panel data set that matches information on banking relationships with firm-level data. By relying on insights from recent contributions in the literature, we obtain exogenous credit supply shifters and markups that are both firm specific and time varying. We uncover new findings at this level. In particular, firms more exposed to liquidity risks tend to raise markups in response to negative bank-loan supply shocks, while less exposed firms generally reduce them. Further empirical analyses suggest that our findings are mostly consistent with models featuring a sticky customer base, where financially constrained firms have an incentive to raise markups in order to sustain liquidity without losing too many customers. Our results have important economic implications regarding the cyclicality of the aggregate markup.

The Causal Impact of Distance on Bank Lending

We investigate the role of physical distance in corporate lending by exploiting infrastructure improvements as shocks to travel time. Lower travel time increases the likelihood of initiating a new banking relationship, consistent with an economic surplus from lower transaction costs. In existing lending relationships, banks capture part of this surplus by increasing interest rates, in particular, if banks have higher bargaining power. Reductions in travel time to competing banks have the opposite effects. Banks benefit from improved infrastructure through an increase in clients, and lenders that rely more on technology do not exhibit sensitivity to changes in distance. This paper was accepted by Victoria Ivashina, finance. Funding: Financial support from Finans|Bergen is gratefully acknowledged. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4346 .

Building loyalty in Islamic banking relationship: a multiple mediation approach empirically in Indonesia

Building loyalty in Islamic banking relationship: a multiple mediation approach empirically in Indonesia

An Empirical Assessment of Success Factors Boosting Zimbabwean Banking Consumer Confidence

Consumer confidence is a crucial factor determining a bank's performance. This study examines the key success factors for increasing bank customer confidence in Zimbabwe. Three research objectives were set and explored using a quantitative survey approach with a sample of 426 bank employees and customers to establish the critical success factors for restoring consumer confidence in Zimbabwe. The critical success factors to restore consumer confidence in the banking sector in Zimbabwe are found in this current study using Exploratory Factor Analysis (EFA). The results indicated that the essential factors of success to be implemented to restore consumer confidence in banks in Zimbabwe are customer satisfaction, location and convenience, product range or size of the bank, digitalization of the processes, service culture, bank relationships, and market position of the bank. The study recommended that the banking and financial services sectors in Zimbabwe should offer more customer satisfaction-driven products, improve the product range, be available in different locations and offer convenient services to the customers. These should be coupled with prompt handling of customers' complaints through different channels and digitalization of the banking processes to enhance banking relationships and restore consumer confidence.

Banking relationship and default priority in consumer credit: Evidence from Thai microdata

Banks play an important role in consumer credit, and when borrowers face a decision on whether to default on mortgage or non-mortgage loans first, banking relationship may matter. Our study provides first evidence into the interplay between banking relationship and consumer default priority via credit bureau data of 1 million individuals in Thailand. We find that same-bank borrowers are less likely to default on mortgage loans first, and borrowers with longer banking relationship and lower switching cost are more likely to default on mortgage loans first (which is welfare-improving). Our results suggest that banking relationship can lead to better outcomes for defaulting borrowers even when switching cost is high.

Firm–bank “odd couples” and trade credit: Evidence from Italian small- and medium-sized enterprises

One of the most crucial obstacles for small- and medium-sized enterprises is access to credit primarily because of their high opacity. The existing literature underlines that relationship banks specialize in analyzing opaque firms, thereby allowing them better access to credit; however, what can opaque firms do if they cannot find a relationship bank? By using an Italian database, with more than 900 firms, we reveal that when opaque firms deal with transactional banks (the “odd couples”), they use a greater portion of trade credit. This result is robust to alternative measures of trade credit and lending technologies. We further analyze the mechanisms driving the association between odd couples and trade credit use. Regression results suggest that the positive association is particularly significant for firms with more market power, not “captured” by their primary bank, and located in areas with high levels of social capital.

Relationship lending, access to credit and entrepreneurial orientation as cornerstones of venture financing

PurposeThis paper investigates the effect of entrepreneurial orientation (EO) on small- and medium-sized enterprises' (SMEs) access to credit. Starting with the idea that SMEs' strategy-making process, structures and behaviour can favour credit access, the authors also explore the moderating role of bank lending technologies in shaping this relationship.Design/methodology/approachThis study relies on a unique survey of Austrian and Italian SMEs which contains detailed information on access to credit, EO dimensions, relationship lending and firm-level characteristics. The authors perform stepwise logistic regressions to assess whether EO interacts with SME's access to finance, and how relationship lending enhances this relationship.FindingsProactiveness, autonomy and competitive aggressiveness are important constructs for improving access to bank financing. Those dimensions became more important when a relationship bank is involved, suggesting a role for relationship lending in overcoming SMEs' opaqueness. In addition, relationship lending is crucial for innovative SMEs in overcoming credit denial rates.Research limitations/implicationsThe small sample did not allow to analyse the effect of EO on discouraged borrowers. Furthermore, alternative measures of relationship lending (such as geographical proximity or the length of the relationship) and the share of credit granted by the relationship bank would have been interesting to further validate our results.Practical implicationsThis study shows that EO dimensions and the type of lending technology are relevant for the financial success of SMEs. More precisely, the authors show that diversity within the banking system helps innovative, autonomous, proactive and competitive SMEs. These important pieces of soft information are injected into the final lending decision when a relationship bank is involved. The evidence suggests the need for SMEs to interact with local banks to fully exploit their EO posture.Originality/valueTo the authors' knowledge, this paper is the first attempt to analyse whether relationship lending can affect the EO–credit access relation.

An introduction to cross-border payments within the COMESA region of Africa

Within Africa, cross-border payments are yet to become seamless and efficient, and correspondent banking relationships with multiple intermediaries still dominate the payments arena. The cultural divide between anglophone and francophone countries extends to key differences in legal and regulatory frameworks, governance structures, payment channels and currencies. This paper explores the landscape of cross-border payments and the various associated challenges, emphasising the importance of keeping to a specific journey and focusing on one hurdle at a time. Written against the backdrop of the recently passed Africa Continental Free Trade Area agreement, this paper argues that if Africa is to succeed in its pursuit of an effective cross-border retail payments environment, the various stakeholders involved will have to embrace customer-friendly interfaces, fair pricing, standard operating rules and predictable/ reliable payment rails. While it is possible to have differences in infrastructure, as shall be seen in the paper, the adoption of common principles is essential to the development of the sector.

Creditor rights and lending relationships

ABSTRACT We assess the impact of the Insolvency and Bankruptcy Code (IBC) enacted in India in 2016 on corporate behaviour. Using firm-level data for 2009–2018, we find that IBC lowered debt and borrowing costs. The impact was pronounced for firms with multiple banking relationships, although it was firms with single banking relationships that experienced significant cutbacks in investment.

Challenges of services sector SMEs in a developing country: A case of Ghana

ABSTRACT Small and medium-sized enterprises (SMEs) face diverse challenges that require solutions to enable the sector to thrive. The study used a sector-based approach to assess the challenges of SMEs from the financial institutions’ and SMEs’ points of view and suggested solutions to the challenges with a focus on the service sector in Ghana. The findings revealed that diversion of funds, inconsistencies in business, and lack of documentation prevail and are curbed by using mobile banking, improving relationship banking, and monitoring. From the analysis of 688 SMEs, high taxes and informal competitions are the highest-ranked challenges, while access to finance is ranked tenth. The policy recommendation is to reduce SME taxes and ban the importation of inferior goods.