The relationship between lending to small and medium enterprises and non-performing loans for the commercial banks in Kenya
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Small and Medium Enterprises banking is an industry in transition. From a market that was considered too difficult to serve, it has now become a strategic target of banks worldwide. This sector was formerly considered as the 'missing middle' because the businesses were too small to be financed by the commercial banks and too large to be financed by the micro finance institutions. This financing gap has however started shrinking, but on the other hand the non-performing loans are increasing for the commercial banks in Kenya. The immediate consequence of nonperforming loans in the banking industry is bank failure, which ultimately leads to closure. This therefore led to the study that sought to establish the relationship between lending to small and medium enterprises and the non-performing loans for commercial banks in Kenya. Descriptive survey design was used. The population of the study consisted of all the 43 Commercial Banks in Kenya. The primary data on the non-performing loans for Commercial Banks was collected using structured questionnaires. Secondary data was collected from Financial audited accounts and the Banking Survey to acquire the nonperforming loans data for commercial banks in Kenya. Data was analyzed through the statistical package for social sciences (SPSS version 17) and presented using tables and charts for easy understanding and analyses. Inferential statistics was used to establish the relationship between lending to the Small and Medium Enterprises and the increase in non-performing loans for the Commercial Banks. The findings conclude that non-performing loans in commercial banks resulting from poor credit risk assessment, information asymmetry, business profile and decentralized management, employment of unqualified and unprofessional staff, moral hazards and macroeconomic factors, led to reduced lending to small and medium enterprises. There is a strong negative relationship between financing of the Small and Medium Enterprises and non-performing loans for commercial banks that vary at 1.871 for credit risk assessment, 0.674 for instability in macroeconomic factors and 2.0 for employment of unqualified and unprofessional staff and a positive relationship by 0.286 as a result of decentralised management approach, 1.458, as a result of information asymmetry and 0.216 as a result of moral hazards. In the event that there are no non-performing loans, financing to small and medium enterprises will be at 6 units. The findings established a variation of 99.1 % of financing the SMEs by commercial banks which varied with variation with the variables credit risk assessment, decentralized management approach, information asymmetry, moral hazards, macroeconomic factors and employment of qualified and professional staff at a confidence level of 95%. There is therefore a relatively strong negative relationship between lending to small and medium enterprises and non-performing loans for commercial banks in Kenya.