DETERMINANTS OF LENDING TO SMALL AND MEDIUM ENTERPRISES BY COMMERCIAL BANKS IN KENYA

The availability of external finance for small and medium enterprises (SMEs) is a topic ofrnsignificant research interest to academics and an important issue to policy makers aroundrnthe globe. Majority of entrepreneurs in the SME sector are still considered not creditrnworthy by most commercial banks because of their inability to fulfill certain bankingrnterms and conditions. Hence, the aim of this study was to investigate the determinants ofrnlending to small and medium enterprises by commercial banks in Kenya. To achieve thernstudy objectives used a descriptive research was used. The study undertook a census ofrnthe 43 commercial banks in Kenya. The study used secondary data from the annualrnpublished report of commercial banks in Kenya for a period of 5 years from 2010-2014.rnThe data collected was analyzed through the multiple linear regression using thernStatistical Package for Social Studies version 20. The study findings established that bankrnsize; credit risk and banks liquidity significantly influences lending to SMEs byrncommercial banks in Kenya. In addition the study established that the volume of depositsrnand interests rates have no significant influence on lending to SMEs. Further, the studyrnestablished that liquidity and the volume of deposits have a negative relationship withrnlending to SMEs while bank size, credit risk and interest rates have a positive relationshiprnwith lending to SMEs. The study concluded that bank size, credit risk, liquidity, depositsrnand interest rates are major determinants of lending to small and medium enterprises byrncommercial banks in Kenya and recommended that effective policies should berndeveloped to ensure commercial banks advance more credit to small and mediumrnenterprises.

DECLARATION- - - - - - - - - - - - - - - - -  ii

ACKNOWLEDGEMENTS - - - - - - - - - - - - - .iii

DEDICATION- - - - - - - - - - - - - - - - .. iv

LIST OF TABLES - - - - - - - - - - - - - - -  viii

LIST OF ABBREVIATIONS - - - - - - - - - - - - - .. ix

ABSTRACT- - - - - - - - - - - - - - - - -  x

1.1 Background of the Study- - - - - - - - - - - - -  1

1.1.1 Lending to SMEs- - - - - - - - - - - - - - .. 2

1.1.2 Factors Influencing Lending to SMEs- - - - - - - - - . 5

1.1.3 Commercial Banks in Kenya - - - - - - - - - - - . 7

1.2 Research Problem- - - - - - - - - - - - - - - . 8

1.3 Research Objective- - - - - - - - - - - - - -  11

1.4 Value of the Study- - - - - - - - - - - - - - . 11

2.1 Introduction - - - - - - - - - - - - - - - - . 13

2.2 Theoretical Review - - - - - - - - - - - - - - -  13

2.2.1 Credit Rationing Theory- - - - - - - - - - - - -  13

2.2.2 Financial Intermediation Theory - - - - - - - - - -  15

2.2.3 Information Asymmetry Theory- - - - - - - - - - . 16

2.2.4 Adverse Selection Theory - - - - - - - - - - - -  17

2.3 Empirical Review- - - - - - - - - - - - - - .. 18

2.4 Summary of Literature Review- - - - - - - - - - - .. 24

3.1 Introduction - - - - - - - - - - - - - - - - . 26

3.2 Research Design- - - - - - - - - - - - - - - . 26

3.3 Population of the Study- - - - - - - - - - - - -  26

3.4 Data Collection- - - - - - - - - - - - - - - -  27

3.5 Data Analysis - - - - - - - - - - - - - - - . 27

3.5.1 Analytical Model - - - - - - - - - - - - - -  27

3.5.2 Test of Significance - - - - - - - - - - - - - -  28

4.1 Introduction - - - - - - - - - - - - - - - - . 29

4.2 Analysis of Data and Presentation of Findings- - - - - - - - -  29

4.2.1 Response Rate- - - - - - - - - - - - - - . 29

4.2.2 Descriptive Statistics - - - - - - - - - - - - - . 29

4.2.3 Correlation Studies- - - - - - - - - - - - -  31

4.2.4 Regression Analysis - - - - - - - - - - - - - .. 32

4.3 Interpretation of the Findings- - - - - - - - - - - - .. 35

5.1 Introduction - - - - - - - - - - - - - - - - . 37

5.2 Summary - - - - - - - - - - - - - - - - . 37

5.3 Conclusions- - - - - - - - - - - - - - - - . 38

5.4 Recommendations for Policy - - - - - - - - - - - - .. 39

5.5 Limitations of the Study- - - - - - - - - - - - - -  39

5.6 Suggestions for Further Research - - - - - - - - - - - .. 40

Appendix I: List of Commercial Banks in Kenya- - - - - - - - . 49

Appendix II: Panel Data of the Sampled Commercial Banks- - - - - - . 50

Appendix III: Data Collection Worksheet - - - - - - - - - - .. 55

Table 4.1 Summary Statistics - - - - - - - - - - - - - - - - - - - - - - - - .. 30

Table 4.2 Correlation Matrix - - - - - - - - - - - - - - - - - - - - - - - - -  31

Table 4.3 Model Summary - - - - - - - - - - - - - - - - - - - - - - - - - .. 32

Table 4.4 ANOVA - - - - - - - - - - - - - - - - - - - - - - - - - - - - -  33

Table 4.5 Regression Coefficients - - - - - - - - - - - - - - - - - - - - - - -  34

CBK - Central Bank of Kenya

FSD - Financial Sector Deepening

Mfls - Micro Finance Institutions

SACCOs - Savings and Credit Cooperative Societies

SMEs - Small and Medium Enterprises

SMMEs - Small, Micro and Medium Enterprises

SPSS - Statistical Package for Social Studies