Challenges in Financing Small & Medium Enterprises (Smes) in Kenya the Experience of Fina Bank Kenya Limited

Abstract

The study was seeking to determine the challenges faced in the process of financing SMEs in Kenya, examine how commercial banks with specific reference to Fina Bank are trying to address these challenges and to examine the banking needs of Small and Medium Enterprise in Kenya. The study was a case study and the unit of study was Fina Bank (K) Limited and therefore, no sample in the study. Primary data was collected using structured questionnaires while the published financial statements for the bank were the main source of secondary data. The questionnaires were divided into three sections; section A addressed the background information on Fina bank; section B addressed SME products offered by the bank while section C addressed the challenges commercial banks face in the process of extending finance to SMEs. Out of 19 questionnaires distributed only 15 were filled and returned. This represented a response rate of 79% with a non-response rate of 21%. This was a good representation from the respondents which have resulted into conclusive research findings. Detailed information on bank's operation especially on the guarantee schemes, sources of funds and the total sum of SME lending book could not be availed due to bank's confidentiality policy. These were some of the challenges faced while collecting data in the field. An empirical survey should be done to include all of the 45 registered commercial banks in Kenya which might produce representative results. Small business enterprises financing faces various challenges in the process of accessing credit from commercial banks in Kenya. Major challenges faced by commercial banks as revealed by the study in the process of lending to small businesses are mainly: lack of banking/credit history to allow them access the funds easily from commercial banks, they have no valuable collateral to act as security for their financing, non-registration of businesses; lack of financial statements required for financing and lack of keeping proper books of accounts. All these issues are challenges impeding on financing the small businesses by commercial banks. Hence they resort to informal sources of financing which proves to be expensive and not cash flow projected. The research revealed that 33% of SME customers preferred business loans with 60% of the applicants goes for loans rangiog between Kshs. 500,000 and Kshs. 1 Million. Most SMEs do not submit mandatory documents required for financing by commercial banks. 100% of SMEs submit balance sheets, 66.7% cash flow projections while 53.3% submits certificates of registration/incorporation. This indicates a bigger challenge the commercial banks face in financing this sector. Securities provided are also weak as 22% provides chattels mortgage and inventory hypothecation while 4% provide housing as their collateral. The study recommends that a further research can also be done on the challenges facing Small and Medium Enterprises in getting financing from commercial banks in Kenya and a more detailed research could also be done to look into different financing strategies adopted by commercial banks in serving the SME sector.