Abstract
Blockchain is an emerging decentralized architecture and distributed computing paradigm and has recently attracted intensive attention from all sectors of society. This paper sets up a theoretical model to analyze a new credit pattern that allows small and medium-sized enterprises (SMEs) assessing bank loans through the blochchain technology. Theoretical analysis demonstrates that the blockchain technology enables the decentralized consensus recording of success of debt repayment or debt default rendered by verifying and validating certain lending and borrowing activities in distributed ledgers. In the newly proposed blockchain embedded credit system, SMEs with low-risk and high-quality could display their credibility and risk class through information distribution. They are more likely to access bank loans even if they are not able to provide collateral. Results derived from the theoretical model present two main findings. First, the alleviation of information asymmetry and credit rationing problems can be achieved through decentralized consensus and information distribution among all participants. Second, the risk sharing mechanism involving government, banks and firms, will not only make the establishment of such an innovative system possible, but also create risk pool for the blockchain based lending and borrowing.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Please be noted that only low-risk company (i = 1) will borrow through the blockchain channel in this case.
In the real market, this assumption was partially supported by a number of corporate social responsibility (CSR) studies. For instance, Wu and Shen (2013) argue that CSR sacrifice profit for social benefits and the effect of CSR on profit is positive for strategic banks and close to zero for altruistic banks. We are grateful for an anonymous referee pointing out this in the referee report.
References
Acharya, V., Naqvi, H.: The seeds of a crisis: a theory of bank liquidity and risk taking over the business cycle. J. Financ. Econ. 106(2), 349–366 (2012)
Berger, A.N., Frame, W.S., Ioannidou, V.: Tests of ex ante versus ex post theories of collateral using private and public information. J. Financ. Econ. 100(1), 85–97 (2011)
Besanko, D., Thakor, A.V.: Collateral and rationing: sorting equilibria in monopolistic and competitive credit markets. Int. Econ. Rev. 28(3), 671–689 (1987)
Bester, H.: Screening vs. rationing in credit markets with imperfect information. Am. Econ. Rev. 75, 850–855 (1985)
Bester, H.: The role of collateral in credit markets with imperfect information. Eur. Econ. Rev. 31, 887–899 (1987)
Bolton, P., Freixas, X., Shapiro, J.: The credit ratings game. J. Finance 67(1), 85–111 (2012)
Cenni, S., Monferrà, S., Salotti, V., Sangiorgi, M., Torluccio, G.: Credit rationing and relationship lending. Does firm size matter? J. Bank. Finance 53, 249–265 (2015)
Chan, Y.S., Kanatas, G.: Asymmetric valuation and the role of collateral in loan agreements. J. Money Credit Bank. 17, 84–95 (1985)
Cong, L.W., He, Z.: Blockchain disruption and smart contracts (No. w24399). National Bureau of Economic Research (2018). https://ssrn.com/abstract=3138382
Cong, L.W., He, Z., Li, J.: Decentralized mining in centralized pools (2018). http://www.law.nyu.edu/sites/default/files/upload_documents/SSRN-id3160046_1.pdf
Dai, J., Vasarhelyi, M.A.: Toward blockchain-based accounting and assurance. J. Inf. Syst. 31(3), 5–21 (2017)
Diffie, W.: The first ten years of public-key cryptography. Proc. IEEE 76(5), 560–577 (1988)
Fanning, K., Centers, D.P.: Blockchain and its coming impact on financial services. J. Corp. Account. Finance 27(5), 53–57 (2016). https://doi.org/10.1002/jcaf.22179
Nakamoto, S.: Bitcoin: a peer-to-peer electronic cash system (2008). https://bitcoin.org/bitcoin.pdf
Ono, A., Uesugi, I.: Role of collateral and personal guarantees in relationship lending: evidence from Japan’s SME loan market. J. Money Credit Bank. 41(5), 935–960 (2009)
Peters, G.W., Panayi, E.: Understanding modern banking ledgers through blockchain technologies: future of transaction processing and smart contracts on the internet of money. In: Tasca, P., Aste, T., Pelizzon, L., Perony, N. (eds.) Banking Beyond Banks and Money, pp. 239–278. Springer, New York (2016)
Pilkington, M.: Chapter 11: Blockchain technology: principles and applications. In: Xavier Olleros, F., Zhegu, M. (eds.) Research Handbook on Digital Transformations, p. 225 (2016). https://doi.org/10.4337/9781784717766.00019
Raskin, M., Yermack, D.: Digital currencies, decentralized ledgers, and the future of central banking (No. w22238). National Bureau of Economic Research (2016). https://doi.org/10.3386/w22238
Smith Jr., C.W., Warner, J.B.: On financial contracting: an analysis of bond covenants. J. Financ. Econ. 27(2), 473–521 (1979)
Spence, M.: Market Signalling: Information Transfer in Hiring and Related Processes. Harvard University Press, Cambridge (1973)
Steijvers, T., Voordeckers, W.: Collateral and credit rationing: a review of recent empirical studies as a guide for future research. J. Econ. Surv. 23(5), 924–946 (2009)
Stiglitz, J.E., Weiss, A.: Credit rationing in markets with imperfect information. Am. Econ. Rev. 71, 393–410 (1981)
Watson, H.: Credit markets and borrower effort. South. Econ. J. 50(3), 802–813 (1984)
Wette, H.C.: Collateral in credit rationing in markets with imperfect information: note. Am. Econ. Rev. 73, 442–445 (1983)
Wu, M.W., Shen, C.H.: Corporate social responsibility in the banking industry: motives and financial performance. J. Bank. Finance 37(9), 3529–3547 (2013)
Yermack, D.: Corporate governance and blockchains. Rev. Finance 21(1), 7–31 (2017)
Acknowledgements
This research is financially supported by Key Scientific Research Fund of Xihua University (Funding No. ZW17136) and Department of Science and Technology of Sichuan Province (Funding No. 2018ZR0296).
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Wang, R., Lin, Z. & Luo, H. Blockchain, bank credit and SME financing. Qual Quant 53, 1127–1140 (2019). https://doi.org/10.1007/s11135-018-0806-6
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11135-018-0806-6