Lending to small and medium enterprises on financial performance of commercial banks in Kenya

Abstract

The banking industry in Kenya is now characterized by increasing competition and innovation. This phenomenon has led to most banks adopting cutting edge technology and creating more tailor made products in different sectors especially SME sector to improve the quality of their loan portfolio. This paper tries to establish the relationship between performance of credit facilities to SMEs and other sectors and the performance of commercial banks in Kenya and to examine the credit policies of commercial banks in Kenya. The study focuses on performance of commercial banks in Kenya on lending to SMEs. The main value of this study is to establish the relationship between performances of commercial banks vis a viz lending to SMEs from a Kenyan perspective. Relevant recommendations aimed at enhancing the banking sector based on the topic of the study are also made. The study is not only useful to the policy makers and academicians, but also to entrepreneurs interested in the banking sector. The study established the relationship between lending to SMEs and performance of commercial banks in Kenya. Survey of existing literature on the subject was done and interviews were held to 23 respondents to establish the relationship between lending to SMEs and performance of commercial banks in Kenya. Data from 23 respondents was collected using questionnaire developed. Information obtained was analyzed. Correlation analysis was used to determine relationships among variables. The research study found out that the highest PAR in the consumer and Agriculture sector stood at 15% and the lowest at 0.0%. The highest PAR in the Micro Enterprises sector is 9.10% and the lowest is at 2%. In the SME sector the highest PAR is at 1.80% and lowest in the sector is at 0.0%. This means that the higher the PAR the higher the amounts to provision for write offs and this directly eats into the profits of commercial banks. The lower the PAR the better for the commercial banks since the provisioning with be of lesser amounts meaning grater performance in terms of profitability. Comparing the three sectors it is evident that SME sector is performing well with very low percentages of PAR. Results of the study reveal strong relationship between financial performance of commercial banks in Kenya and lending to SME sector as compared to other sectors like consumer and Agriculture and micro enterprises. This study had limitations. Some of the respondents did not return the questionnaires even after follow ups were done. Thirty questionnaires were issued but only twenty three were returned. There was difficulty in accessing the respondents due to their busy schedules and getting information, which they felt, was confidential. In addition to this the responses were based on the judgment of the interviewees and this could be subjective.