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The banking system in Tunisia suffers from non-performing loans, fuelling the aversion of banks to credit risk and hindering the financing of SMEs. The research question tackles the ‘transactional lending’  versus  ‘relational lending’ relationship between a sample of 10 Tunisian banks observed over 2005–2017 and its clients, and its impact on non-performing loans. The econometric analysis first tests a linear model between non-performing loans and the determinants ( Size, Ownership  and  Proximity ) of the lending relationship, which suggests that banks are poorly committed in collecting soft information from their clients. Second, the estimation of a (conditional) threshold effect in a non-linear model between these main determinants, distinguishes two regimes, one above and one below the threshold. Three robust outcomes emerge, the (large) size of most banks in the sample constitutes a barrier to meeting loan applications from SMEs, and enhancing tighter customer relationship with a higher number of branches as well as foreign participation in the share capital of these banks would enable to meet these demands.

Lending relationship, small businesses and NPLs in Tunisia