The purpose of this study is to examine the impact of micro, small and medium enterprises (MSMEs) financing on the profitability of Saudi Arabia’s dual banking system.
This study applies the random effect model on the manually collected MSMEs financing data set from the annual reports of the Saudi Arabia 3 full-fledged Islamic banks (FIBs) and 6 hybrid conventional banks (HCBs)- conventional banks with Islamic windows over the 2018–2023 period.
The findings of this study show that MSME financing has statistically significant positive impacts on overall bank profitability. However, when we estimate FIBs and HCBs separately, the findings show that the impact of MSME financing on the profitability of FIBs is also positive and statistically significant. Notably, the findings are economically significant and are robust even when we apply alternative dependent variables and econometric models. While the overall MSMEs total financing increases the mean value of the profitability [return on assets (ROA)] of the overall banks by 12%, it boosts the mean value of the profitability (ROA) of the FIBs by 23%.
The findings of this study offer some important insights to policymakers and Saudi Arabia banking system regulators and managers as well as to countries with dual banking systems, confirming empirically the benefits of financing MSMEs for banks. Therefore, the findings of this study may further encourage and enforce Saudi Arabia’s dual banking system to offer more financing to MSMEs.
To the best of the authors’ knowledge, this is the first study that empirically examines the impact of MSME financing on the profitability of the dual banking systems, which adds value in the knowledge of small business financing and bank profitability, especially in the context of the dual banking system of emerging economies.
