Determinants of Lending to Small and Medium Enterprises by Commercial Banks in Kenya

Abstract

The availability of external finance for small and medium enterprises (SMEs) is a topic of significant research interest to academics and an important issue to policy makers around the globe. Majority of entrepreneurs in the SME sector are still considered not credit worthy by most commercial banks because of their inability to fulfill certain banking terms and conditions. Hence, the aim of this study was to investigate the determinants of lending to small and medium enterprises by commercial banks in Kenya. To achieve the study objectives used a descriptive research was used. The study undertook a census of the 43 commercial banks in Kenya. The study used secondary data from the annual published report of commercial banks in Kenya for a period of 5 years from 2010-2014. The data collected was analyzed through the multiple linear regression using the Statistical Package for Social Studies version 20. The study findings established that bank size; credit risk and banks liquidity significantly influences lending to SMEs by commercial banks in Kenya. In addition the study established that the volume of deposits and interests rates have no significant influence on lending to SMEs. Further, the study established that liquidity and the volume of deposits have a negative relationship with lending to SMEs while bank size, credit risk and interest rates have a positive relationship with lending to SMEs. The study concluded that bank size, credit risk, liquidity, deposits and interest rates are major determinants of lending to small and medium enterprises by commercial banks in Kenya and recommended that effective policies should be developed to ensure commercial banks advance more credit to small and medium enterprises.