Factors influencing credit rationing by commercial banks in Kenya

Abstract

Although banks have a primary role of providing credit, there is historical evidence of credit rationing even to creditworthy borrowers by commercial banks all over the world. This suggests that banks, when issuing credit, are concerned not only with the creditworthyness of borrowers but also with other broader issues or factors whose significance was their influence on the banks' degree of credit rationing. Upto the late 1980s the ownership structure of a firm greatly influenced the credit rationing behaviour of banks in Kenya such that foreign-owned companies and later govemment- owned enterprises were favoured for credit. This study aimed at identifying the factors currently influencing credit rationing by Kenyan commercial banks. This was done by testing the banks against factors identified for commercial banks in other parts of the world. The study also aimed at ranking the factors in order of importance to the banks. Data was analysed using Factor Analysis and the population of the study comprised all the 45 banks in operation as at 31.07.02. Only 23 banks responded to the questionnaires amounting to a response rate of 51%. The study established that the most important factors influencing credit rationing were related to perceived credit risk arisiJ?gfrom inadequate reliable information on the creditworthiness of borrowers. Scarcity of profitable investment projects and an emphasis on attaining assetsliabilities balance were also very important. The characteristics of a potential borrower had a major impact on the credit rationing behaviour of most banks in particular the past performance and level of financial gearing of the firm. The age and size of the firm were also important factors, with.larger and older firms being favoured for credit.