Risk Management Strategies Adopted by Kenyan Commercial Banks in Lending to Smes

Abstract

In the recent past, there has been an increased effort in the country to fund credit small-scale enterprises. Awarding this credit to the small scale enterprises is a journey, whose success depends on the methods applied to evaluate and award the credit so as to minimise the risk the banks expose themselves in and how the banks mitigate the same risks. It is with this regard that the study seeks to identify the institutional risk management strategies applied by commercial banks in lending to SMEs. The research was a survey that was conducted within all the banks represented in Nairobi, An exploratory survey was used in carrying out this study. The study focused on all commercial banks in Kenya who have well established SME products. According to the Central Bank of Kenya Act Chapter 491, there are forty six commercial banks operating in Kenya, with one bank under statutory management. The research drew its data from primary sources using a structured questionnaire. Both E-mail system and the use of the “drop & pick later” method were used to collect the data. The questionnaire was administered to the Credit-Manager or their equivalent in each banks office. Data from the questionnaire was coded to facilitate statistical analysis. The data was organized through frequency tables, to enable develop a summary of the data collected and to organize it into meaningful form. Percentages were used to compare groups of the different sizes The results of the research revealed that there were three distinctive institutional risk management strategies that are applied by Kenyan banks in lending to SME borrowers. These are risk pooling strategies, the risk control strategies and risk avoidance strategies. The research indicated that the institutional context in Kenya has determined how the banks handle the three risk strategies