Last week I posted the article “Distribution Issues in SME Lending” by Benel D. Lagua. Within that article he stated that evidence existed showing a positive correlation between increased SME lending and financial stability. After enquiring with the author he did provide the following reference Peter J. Morgan and Victor Pontines, Financial Stability and Financial Inclusion, ADBI Working Paper Series, ADBI Institute.
We find some evidence that an increased share of lending to small and medium-sized enterprises (SMEs) aids financial stability, mainly by reducing non-performing loans (NPLs) and the probability of default by financial institutions. This suggests that policy measures to increase financial inclusion, at least by SMEs, would have the side-benefit of contributing to financial stability as well.