Relationship between credit scoring by Commercial Banks and small and medium enterprises' loans accessibility in Kenya

Abstract

The process of qualifying a customer for credit pegged on his ability to pay back is called credit scoring. The result of credit scoring is a credit score. Credit scoring is a relatively new concept in the Kenyan banking industry. Studies show that the earliest commercial banks in Kenya started using credit scoring was between the year 2000 and 2004. This study sought to establish the relationship between credit scoring by commercial banks and loans accessibility by SMEs in Kenya. The type of data used was both primary and secondary. The census type of sampling was used comprising of all 43 commercial banks in Kenya. Descriptive analysis was used to analyze the data. Regression analysis was used to establish the relationship between credit scoring and loans accessibility by SME customers in Kenya through the Excel and SPSS statistical tools. The study concludes that there exists a strong positive relationship between credit scoring and loans accessibility by SME customers in Kenya. This is explained by the various parameters considered while scoring an SME credit customer. For the purpose of this study, these include the sector of operation, type of collateral held, previous credit history, existing and projected cash flows as well as the status of a customer's financial statements or audited if available. Dwelling on SMEs, the study recommends further research focusing on the uptake of different types of credit prevalent among the SMEs. The study also recommends more studies into improving the adoption of credit scoring by not only commercial banks but by micro finance institutions and other financial institutions in Kenya to promote growth of SMEs. The use of credit scoring will lead to an increase in loan accessibility by customers.