While SMEs constitute the backbone of many economies, many SMEs have limited access to finance. Yet, banks in some countries are actively financing SMEs. This paper examines whether this is true in the case of Turkey, a G20 economy that has a significant SME sector. We study the determinants of banks' willingness to finance SMEs and banks' processing ability of SME financing portfolio in Turkey based on a unique quarterly small business panel data set of 40 commercial banks from 2006 to 2014. Employing pooled OLS and fixed-effects estimators, we find that Islamic banks (known as Participation banks in Turkey) are more inclined toward financing SMEs than conventional banks. We also find that the quality of Islamic banks' SME loan portfolio is comparable to that of conventional banks. The results are fairly robust to different bank ownership forms (state owned, private, and Islamic banks) and alternative model specifications. Our findings provide further support to the notion of 'small is the new big' in that banking for SMEs can be a viable venture.

Events such as the 'credit crunch', 'bank run', 'financial contagion', 'flight to quality' and 'systemic risks' have widely transpired in recent times. One important dimension permeating these events is the dynamic link between macroeconomic shocks and banks' behaviour. Economic crises experienced by five East Asian countries in the late 1990s were accompanied by financial sector problems. The Great Recession of the late 2000s also corresponded to heightened solvency risks affecting over-leveraged banks and financial institutions in many developed countries. In a world of imperfect information, adverse macroeconomic shocks could weaken firms' balance sheets, diminish bank capital and trigger financial disintermediation. Available in physical copy only (Call Number: BP 173.75 H236)