The Relationship between Credit Scoring Practices by Commercial Banks and Access to Credit by Small and Medium Enterprises in Kenya

Abstract

Banks that have adopted credit scoring have realized significant increases in the importance of small business and micro business loans in the total lending portfolio subsequent to the use of credit scoring in the lending decision. The objective of this study was to establish the relationship between credit scoring by Kenyan banks and access to credit by SMEs in Kenya. This was an explanatory study where the research sought to establish a relationship between the use of credit scoring and access to credit for SME loans by Kenyan banks. A census survey was conducted involving all 43 Commercial Banks in Kenya registered and licensed under the banking act as at 31st December 2009 as per the Central Bank of Kenya. This study used primary data that was collected from the respondents of the survey. Data was captured and analyzed using Statistical Package for the Social Sciences (SPSS) version 17. Regression analysis was used to determine the relationship between credit scoring and approval rates for SME’s. The study concludes that there is a relationship between credit scoring by Kenyan banks and access to credit by SMEs in Kenya. The benefits gained from the use of credit scoring include accuracy in the decision making process. This accuracy is gained to the reduction of adverse selection cases where better assessments are made in regards to an application therefore providing better decision making. The study recommends that banks need to use various credit assessment methods before availing loans to SME applicants. This in turn improves the credit scoring of banks. In addition, the banks need to regularly review their credit policies.