Determinants of loan defaults by small and medium enterprises among commercial banks in Kenya

Abstract

This study sought to determine the relationship between Non-performing Loans associated with SME sector and its determinants among commercial banks in Kenya. The research methodology used was a descriptive survey design and the population of was all commercial banks in Nairobi region. The population of the study consisted of all the commercial banks in Kenya. Information collected was by use of a questionnaire which made use of both open and closed ended questions. The questionnaire used a five point likert scale which ranged from strongly agree to strongly disagree. Data was edited for accuracy, uniformity, consistency and completeness and arranged to enable coding and tabulation for final analysis. This study also used multiple linear regressions to analyze the data. The study found out that Loan defaults by SMEs has significantly been increasing and a number of determinants affected the loan defaults key among them interest rates and how long the business has been in operation. The character of the applicant has been found to have a significant impact on loan defaults. Poor Credit Analysis and monitoring, type of loan,repayment period and economic conditions also contributed to loan defaults by SMEs. From the results, it is evident that for all the banks who lend to SME, the SME loan book contained a significant level of Non-performing loans. The study recommends that commercial banks should put more emphasis on Credit Risk Management, training of staff and adopt credit scoring in vetting of SME customers loan requests.