An Evaluation of Credit Appraisal Techniques Adopted by Kenyan Commercial Banks in Lending to Small and Medium-sized Enterprises

Abstract

The study was about evaluation of credit appraisal techniques used by Kenyan commercial banks in lending to small and medium sized enterprises. Despite the critical role that small and medium sized enterprises (SMEs) play to all economies in the world, provision and delivery of credit and other financial services to SME sector by commercial banks has not been as expected. The main objective of the study is to determine the credit appraisal techniques used by commercial banks in Kenya to evaluate the creditworthiness of SMEs and to establish whether there exists a relationship between the applicable credit appraisal techniques and the level of non-performing loans. The researcher also established challenges facing banks in using the applicable credit appraisal techniques. The research design used was descriptive survey design. The population comprised of forty one commercial banks registered by Central Bank of Kenya and with branches within Central Business District. Primary data was collected by means of semi-structured questionnaires. This study adopted multivariate statistics in analyzing the data. This was used to establish whether various independent variables influence changes in nonperforming loans. The research adopted both quantitative and qualitative approaches to data analysis. The research findings indicate that the following attributes were considered to be of great importance when making lending decision: strength of income statements, strength of the balance sheet, long histories, quality of accounts receivable and inventory, history of the principal owner and transparency of firms through provision of certified financial statements. The researcher recommends that Kenyan banks should adopt debt rescheduling and informal workout as debt recovery methods.