The Role of Relationship Banking on the Performance of Japanese Firms : An Empirical Study on Small and Medium Enterprises

Relationship banking indicating a long-term relationship between a bank and corporate firms attracted a lot of attention lately. There are various studies both theoretical and empirical, regarding the role of such relationship on the profitability of firms. But their conclusion is somewhat mixed. On this background, this paper aimed at drawing empirical evidence to test the impact of relationship banking by taking the time series balance sheet data of small and medium enterprises (SMEs) in Japan. As method of the study, we tried to construct a hypothetical model to test the relationship by including relevant influencing variables. The results of the research indicated that, although relationship banking leading towards corporate shareholding raises profitability of SMEs, increased supply of credit conversely reduces the profits. But overall, relationship banking has positive impact on the profitability of SMEs as there are other reasons to explain the negative relationship between credit and profitability .