Challenges facing commercial banks in credit financing of small and medium micro enterprises within Kisumu town.

Abstract

Small and medium scale enterprises are the backbone of many successful developed and developing nations. However in most developing economies SMEs contribution has not reached a level on par with SMEs in developed countries. Various challenges and impediments prevent SMEs from developing to their full potential. One of which is the access to formal financing. This study sought to determine the factors that inhibit SME lending by commercial banks and gave recommendations on how these could be turned into opportunities. It was found out that most commercial banks are risk adverse lending to informationally opaque SME. As a result they ask for many requirements to enable them gather at least reliable information to enable them evaluate their decisions on lending to this sector. Contrary SME owners are unable to provide what banks want. The poor information environment in many developing countries does not help either. However a positive trend is developing among commercial banks towards serving the SME sector. This is possible because of the credit referencing bureau and the application of credit scoring to SME loans. The research found out that the key challenges commercial banks faces in financing SMEs were among others that SMEs lack proper books of accounts, lack collateral, and their inability to prove their credit worthiness. The research concludes with several recommendations that could facilitate greater access to finance by SMEs. This includes among others the reforms in the countries lending structure improving the information sharing among commercial Banks and embracing other forms of collateral rather than the insisting on the immovable assets. Banks also need to venture into products that will serve the SMEs more effectively.