A survey of the factors that determine credit worthiness of small and medium enterprises for bank loans
Credit risk assessment is an important aspect of credit risk management. It seeks to reduce the occurrence of bank failures caused by non-repayment of amounts due from debtors (Kegode, 2006). Financial institutions grant credit as a means of generating revenue from interest and commissions. Any lending to small and medium enterprises (SMEs) should therefore be well evaluated to minimise the risk of default. This study aimed at carrying out a survey to find out the extent of use of the C's of credit to lend to SMEs by commercial banks in Kenya. The researcher employed a descriptive research design. The target population for this study was registered commercial banks offering credit to SMEs in Kenya. Primary data was collected by use of a likert scale questionnaire, which were delivered to the credit analysts of the commercial banks under study. Data analysis was done through the use of descriptive statistics such as the mean, standard deviations, percentages and tabulations. Inferential statistics were also computed using Pearson's Moment Correlation Coefficient. The study concludes that the C's of good and bad credit influenced creditworthiness of SME customers for commercial banks. Other factors cited were the purpose of the loan, followed by income per annum and whether the SME business is registered, as well as alternative sources of income and the nature of the SME business. The study further concludes that to a great extent, creditworthy evaluations help banks mitigate the risk of default for SME bank loans. The effective management, of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organization. Credit risk assessment seeks to ensure that only creditworthy customers are granted credit. For banks to reduce the non-performance of SME loans, there is need for effective credit policies to be put in place. While evaluating the creditworthiness of SMEs, banks should not be driven by competition for market share or the achievement of high revenue targets as this was found to be a major contributor to the high level of non-performing loans in some banks. There is need to ensure good communication and avoid over reliance on past performance or on large networths as this has led to non-performing loans.