DETERMINANTS OF LENDING TO SMALL AND MEDIUM ENTERPRISES BY COMMERCIAL BANKS IN KENYA
By
DAVID HARITONE SHIKUMO
Presented To
Department of Accountancy
ABSTRACT
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.
TABLE OF CONTENTS
DECLARATION- - - - - - - - - - - - - - - - - ii
ACKNOWLEDGEMENTS - - - - - - - - - - - - - iii
DEDICATION- - - - - - - - - - - - - - - - iv
LIST OF TABLES - - - - - - - - - - - - - - - viii
LIST OF ABBREVIATIONS - - - - - - - - - - - - - ix
ABSTRACT- - - - - - - - - - - - - - - - - x
CHAPTER ONE - - - - - - - - - - - - - - - - - 1
INTRODUCTION- - - - - - - - - - - - - - - - 1
11 Background of the Study- - - - - - - - - - - - - 1
111 Lending to SMEs- - - - - - - - - - - - - - 2
112 Factors Influencing Lending to SMEs- - - - - - - - - 5
113 Commercial Banks in Kenya - - - - - - - - - - - 7
12 Research Problem- - - - - - - - - - - - - - - 8
13 Research Objective- - - - - - - - - - - - - - 11
14 Value of the Study- - - - - - - - - - - - - - 11
CHAPTER TWO - - - - - - - - - - - - - - - - 13
LITERATURE REVIEW - - - - - - - - - - - - - - 13
21 Introduction - - - - - - - - - - - - - - - - 13
22 Theoretical Review - - - - - - - - - - - - - - - 13
221 Credit Rationing Theory- - - - - - - - - - - - - 13
222 Financial Intermediation Theory - - - - - - - - - - 15
223 Information Asymmetry Theory- - - - - - - - - - 16
224 Adverse Selection Theory - - - - - - - - - - - - 17
23 Empirical Review- - - - - - - - - - - - - - 18
24 Summary of Literature Review- - - - - - - - - - - 24
CHAPTER THREE- - - - - - - - - - - - - - - - 26
RESEARCH METHODOLOGY - - - - - - - - - - - - 26
31 Introduction - - - - - - - - - - - - - - - - 26
32 Research Design- - - - - - - - - - - - - - - 26
33 Population of the Study- - - - - - - - - - - - - 26
34 Data Collection- - - - - - - - - - - - - - - - 27
35 Data Analysis - - - - - - - - - - - - - - - 27
3
51 Analytical Model - - - - - - - - - - - - - - 27
352 Test of Significance - - - - - - - - - - - - - - 28
CHAPTER FOUR- - - - - - - - - - - - - - - 29
DATA ANALYSIS, RESULTS AND DISCUSSION- - - - - - - 29
41 Introduction - - - - - - - - - - - - - - - - 29
42 Analysis of Data and Presentation of Findings- - - - - - - - - 29
421 Response Rate- - - - - - - - - - - - - - 29
422 Descriptive Statistics - - - - - - - - - - - - - 29
423 Correlation Studies- - - - - - - - - - - - - 31
424 Regression Analysis - - - - - - - - - - - - - 32
43 Interpretation of the Findings- - - - - - - - - - - - 35
CHAPTER FIVE - - - - - - - - - - - - - - - - 37
SUMMARY, CONCLUSION AND RECOMMENDATIONS - - - - - - 37
51 Introduction - - - - - - - - - - - - - - - - 37
52 Summary - - - - - - - - - - - - - - - - 37
53 Conclusions- - - - - - - - - - - - - - - - 38
54 Recommendations for Policy - - - - - - - - - - - - 39
55 Limitations of the Study- - - - - - - - - - - - - - 39
56 Suggestions for Further Research - - - - - - - - - - - 40
REFERENCES- - - - - - - - - - - - - - - - 41
APPENDICES- - - - - - - - - - - - - - - - 49
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
LIST OF TABLES
Table 41 Summary Statistics - - - - - - - - - - - - - - - - - - - - - - - - 30
Table 42 Correlation Matrix - - - - - - - - - - - - - - - - - - - - - - - - - 31
Table 43 Model Summary - - - - - - - - - - - - - - - - - - - - - - - - - 32
Table 44 ANOVA - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 33
Table 45 Regression Coefficients - - - - - - - - - - - - - - - - - - - - - - - 34
LIST OF ABBREVIATIONS
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
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