The impact of competition on lending relationships of commercial banks in Kenya
This paper sought to investigate the impact of credit market competition on lending relationship in the banking sector, providing a simple framework showing that the extent of competition in credit market is important in determining the nature of lending relationships. Commercial banks are more likely to grow their customer base and loan book value, which translates into increased profitability, if their strategies comprise of environmental analysis, services innovations, intricate relationship with clients and seeking referrals' from the existing customers and other stake-holders in the sector, yielding benefits of lending relationship. The literature offers empirical evidence from business data in support of this hypothesis. The literature on financial intermediation has greatly emphasised the value creation function of lending relationship and the value of the relationship to the clients, whether banks are indeed sharing the benefits of lending relationships with the borrowers cum clients, in form of lower cost of borrowing and efficient services development, evidenced by examining the relative performance offirms with close bank relationships relative to those with weak or no-relationships. It is important to observe that multiple banking is not necessarily an inverse measure of lending relationship. The empirical findings cannot be interpreted in contrast with the hypothesis that: a single-bank lending relationship may benefit the clients. Coupled to this, the literature shed light on how an asymmetric distribution of credit among lending banks affect the clients' borrowing conditions and credit availability or on the coexistence of borrowing-lending relationship with many other lenders in the competition stricken sector. With regard to competition, the commercial banks (including those owned by the state), should be very aggressive in formulating and implementing strategies to curb the forces, most importantly, fostering a formidable relationship with both it's corporate, individuals and small enterprises in a bid to retain and expand their market shares, in the wake of competition. Further, they ought to venture into aggressive market research and excursions to be able to realize intricate needs of the market and device services and products which will meet the needs of their intended clients, key of which is cheaper cost of borrowing in a lending relationship, calling upon them to review application processes and shed-off non value adding activities, rely on the CBK initiative of credit information sharing to select viable borrowers to reduce cost associated with risk of default, and t pursue cheaper sources of credit such as Sacco deposits and translate the same to cheaper credit extension to the selected clients, through an efficient appraisal processes.