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This chapter empirically investigates how banks evaluate the creditworthiness of small- and medium-sized enterprises (SMEs). Following SME loan underwriting literature that distinguishes among different lending technologies, we test whether the typical SME bank loan is underwritten primarily based on just a single technology. We find that although financial statement lending is the most commonly used and serves as a kind of basic technology, it tends not to be used to the exclusion of other technologies. These findings imply that, at least in Japan, SME lending practice may be inconsistent with academic research on how banks underwrite loans elsewhere.

To provide a selective review of most recent developments in experimental economics of banking and lending and to summarize and synthesize the experiment designs and results in banking under asymmetric information.

The review includes recently published or working papers (2006–2013) that exclusively employ experimental economics methodology, especially for studying the impact of formal or informal institutions on lending in credit markets.

The results of the reviewed experimental studies provide support for the important role of both informal (e.g., relationship banking and reputation) and formal (e.g., third-party enforcement; collateral) institutions and their impact on credit market performance, as well as the importance of studying the interaction of the two types of institutions.

The number of studies reviewed is fairly small but growing, indicating that this is the area of growing significance.

Controlled economic experiments are better able to address the questions regarding the direction of causality in empirical relationships. Economic experiments are particularly useful in studying complex markets like credit and capital and in eliciting specific effects of institutions on credit market performance. Such well-established empirical relationships will be able to provide guidance for policy making for financial market reform.

This is the first review of laboratory research in banking and lending under asymmetric information that aims to call attention to this area of research and serves as a starting point for an interested researcher and provide future direction.

Clusters of foreign manufacturing plants are traditionally explained by characteristics of the entry location such as immobile resources or agglomeration advantages, but an alternative explanation is that social or economic relations among firms in the home country facilitate interorganizational learning about entry locations. Such interorganizational learning reduces uncertainty, leading to heterogeneous diffusion of the plant location choices among organizations that are socially proximate in the home country. We examine this hypothesis through analysis of the effect of industry, lending ties, and board interlocks among Japanese firms on their entries into Europe, and find that shared industry and structural equivalence in the board interlock network are strong predictors of mimetic nation choice. The findings suggest that nation choices follow an innovation diffusion pattern, and that Japanese firms have paths of influence like those of U.S. firms.

This paper examines the effect of bank expansion on credit access and terms of credit in early America. The bank records from Plymouth Bank, Massachusetts and the Census records provide detailed information on borrowers, endorser, types and terms of loans, and borrower characteristics. The results show that the introduction of new banks did broaden credit access. However, after competition was introduced, the Bank focused more on short-term bills of exchange. In other words, the Bank shifted its emphasis from long-term accommodation paper to short-term bills of exchange.

We show why investors may prefer not to be a firm’s unique lender, even if they are in a strong bargaining position. Some firms need additional funds after a first investment: providing additional funds is rational after the first investment is sunk, but together the two investments are unprofitable. A unique lender will always provide additional funds and make losses. Two creditors can commit not always to provide funds: inefficient negotiations over debt forgiveness may end with a project’s liquidation, which is harmful ex post, but helpful ex ante, if it keeps entrepreneurs with nonpromising projects from initially requesting funds.

Purpose: The purpose of this chapter is to explore different aspects of FinTech, including its evolution, its impact on the Financial Services industry, its relationship with Islamic Finance and its role in sustainable development, plus understanding its current status in the UAE.

Design/methodology/approach: Using the existing literature, books, website articles, and online news to explore and address various aspects of FinTech and incorporating the acquired knowledge to illustrate the UAE’s initiatives and efforts in adopting and promoting FinTech.

Findings: FinTech is the marriage of Finance and Technology, which has existed a long time ago. Hence, the future calls for collaboration between FinTech leaders and traditional financial institutions to ensure global financial growth. Moreover, FinTech can accelerate the development of Islamic Finance through its powerful tools that can be Sharia compatible, and it can lead to a better sustainable future via empowering and enabling Green Finance. Using this acquired knowledge, the chapter illustrates that the UAE has become a global and regional FinTech hub as it contributes profoundly to the empowerment of FinTech via providing the ideal ecosystem for FinTech initiatives to thrive, which has been witnessed to be extremely powerful, especially during challenging times like the Covid-19 pandemic.

Research limitations/implications: Future research that would tackle different aspects of FinTech in the UAE can use this chapter as a guide toward acknowledging the imperative and the role of FinTech in facilitating financial transactions and perhaps explore ways by which FinTech can be used for wealth protection by paying deeper attention to RegTech and Cybersecurity.

Originality/value: This chapter contributes as an introductory guide to different aspects of FinTech that are relevant to MENA countries and using this knowledge to illustrate the status of FinTech in the UAE.

This article estimates the loan spread equation taking into account the endogenous matching between banks and firms in the loan market. To overcome the endogeneity problem, I supplement the loan spread equation with a two-sided matching model and estimate them jointly. Bayesian inference is feasible using a Gibbs sampling algorithm that performs Markov chain Monte Carlo (MCMC) simulations. I find that medium-sized banks and firms tend to be the most attractive partners, and that liquidity is also a consideration in choosing partners. Furthermore, banks with higher monitoring ability charge higher spreads, and firms that are more leveraged or less liquid are charged higher spreads.

This study examines how creditor interventions after debt covenant violations affect corporate tax avoidance. Using a regression discontinuity design, we find that creditor interventions increase borrowers' tax avoidance. This effect is concentrated among firms with weaker shareholder governance before creditor interventions and among those with less bargaining power during subsequent debt renegotiations. Our results indicate that creditors play an active role in shaping corporate tax policy outside of bankruptcy.

Using the Dealscan database of large, U.S. corporate loans, we examine the determinants of the number of bank relationships and the presence or absence of collateral. Consistent with prior studies, we find that important explanatory variables are firm quality, desire for financial flexibility, the probability of financial distress, growth opportunities and firm size. Higher quality firms as well as firms with a stronger desire for financial flexibility are less likely to collateralize and borrow from more lenders. Larger firms as well as those with lower probabilities of financial distress and greater growth opportunities prefer multiple lenders.