A survey of lending technologies adopted by Commercial Banks in Kenya to mitigate small and medium enterprises opacity problem

Abstract

As the Kenyan economy grows, the need of credit for small business expansion grows likewise. For a long time, commercial banks have been lending to very few individuals and established businesses while sidelining the rest due to perceived risks in small business financing. The objective of this census study was to establish the lending technologies adopted by the commercial banks when advancing credit to informationally opaque small, businesses and to investigate the factors that influence the choice of the technologies. Data was collected with the help of a self administered structured questionnaire. A response rate of 77% was achieved out of the targeted forty four respondents, the data was analyzed with the help of descriptive statistics, such as frequencies and percentages. The findings of the study reveal that there are four lending technologies in the Kenyan small business lending niche that are not applied exclusively as 92% of the commercial banks practice asset based lending, 88% have relationship lending, 83% rely on financial statement lending and 41% apply credit scoring. The predominance of transaction based lending is attributed to the averse nature of commercial banks towards financing small businesses and their preference for temporally shorter relationships with the small business clientele. Of the banks that practice relationship lending, a majority of 87% are foreign promoted commercial banks which points to their efforts to gather soft information about clientele over time. In view of these findings, the author recommends that: There should be financial innovation by lending institutions for developing alternative collateral arrangements for small businesses that are unable to show accumulated net worth in tangible assets since asset based lending is highly adopted by commercial banks in Kenya. Further, there is need to enhance awareness programmes on basic financial statement processing and reporting requirements for the small business owners who may not be sophisticated in financial know how and are disadvantaged in accessing debt capital.