Involvement of mainstream banks in financing small and medium enterprise projects in Kenya. The case of Diamond Trust Bank

Abstract

The development of small scale enterprises (SME) has been identified as one of the strategies for generating industrialization, employment generation and poverty reduction. This is as a result of the recognition of their role in socio-economic development as a means for generating sustainable employment and income in most developing countries, Kenya included. This means that the sustenance of the SMEs is of paramount importance to the improvement of livelihood of a critical mass of the population in the country. One way of ensuring the sustenance of the SMEs is through the provision of capital for investment in form of affordable credit facilities. Available firm-level data collected by the World Bank show that access to finance is one of the main obstacles to SMEs doing business in most developing countries. The limited access to finances, researchers allege had led to the collapse of an appreciable number of the SMEs. None the less, researchers acknowledge that mainstream banking institution appreciate that SME sector has one of the fastest growth rates and have always been willing to invest in them. Thus, over the last ten years or so, it is alleged that mainstream banks have begun to embrace SMEs as an important business partner slowly edging aside micro financial institutions as SMEs source of credit. However, there is limited empirical data on factors that have precipitated the turnaround in the perception of the mainstream banking sector towards financing of SME sector. Specifically, data on the extent and influence of these factors on the involvement of mainstream banks in the financing of SMEs projects in developing countries in general and Kenya in particular are almost nonexistent. This study therefore sought to review the involvement of mainstream banks in financing of SMEs sector in Kenya with specific focus of Diamond Trust bank in an attempt to contribute in bridging the existing knowledge gap. A case study research of Diamond Trust Bank was designed to help seal this research gap by assessing the factors influencing the involvement of banks in financing SME projects. A census survey of the 47 out of 57 bank officers in charge SME programs in the country was undertaken with the 3 being involved in a prior pilot study to pre-test the research instrument. Data was collected using selfadministered questionnaires to branch managers, credit managers and asset finance manager. Data obtained was analysed both quantitatively using descriptive statistics and inferentially with the aid of Statistical Package for Social Sciences (SPSS) version 20 computer software. Specifically, descriptive statistics in the form of frequencies, percentages, mean and standard deviation were used to show various relevant distributions while the relationship between the parameters was tested using Multiple Linear Regression (MLR). Results showed that the factors such as profitability (mean = 4.5319; SD= 0.61218), competition (mean = 4.5036;SD = 0.6074), public image (mean =4.0532; SD = 1.0085) and customer turnover (mean = 4.3298;SD= 0.7506) obtained very high mean rating indicating that they had an influence on the bank’s involvement in financing of SME projects. Results from regression analysis showed that profitability (β = 0.287) and public image (β= 0.118) have a positive influence on the banks involvement while competition (β= -0.158) and customer turnover (β= -0.392) influenced it negatively. Further, the results showed that the influence due to profitability, competition and customer turnover were significant (p<0.05). It is therefore recommended that the bankorganize training and workshops for customers to understand SME banking products, include well-versed SME banking board members and enhancethe bank’s SME customer service mechanism. Similarly, the negative influence of competition and customer turnover on the bank’s involvement in financing of SME projects imply that the bank should strategize on how best to strategically position itself to tap into the SME sector’s rich market.