Trust-based relationship banking, and SME financing in the UK

Abstract

It is well recognized that relationship banking helps to relieve the credit constraints faced by SMEs to access bank finance. Trust is an important part of relationship banking. However, the term trust is nebulous, and relationship banking means different things to different banks and different borrowers. How trust enables the credit market for SMEs through relationship banking is largely unexplored. Using a unique primary dataset of SMEs in the UK, we construct a measure of trust-based relationship banking from the perspective of the borrower that places mutual trust centre stage. We show that trust-based relationship banking is enhanced by the organizational trust in the Relationship Manager, defined by the delegation of operational autonomy. Along with bank, firm, and market factors, trust-based relationship banking helped to reduce the credit constraints faced by SMEs in the decade following the global financial crisis.