The Impact Of Commercial Banks’ Credit On Small And Medium Enterprises Financing In Kenya

ABSTRACT

The study was seeking to determine the impact of commercial banks credit on SME financing in

Kenya. The scope of the study was the 43 commercial banks presently operating in Kenya. A

descriptive survey was undertaken in order to measure the cause and effect of relationships

between the commercial banks returns on equity and SMEs financing. It also described the

relationship between the ratio of commercial bank loans to SMEs to the total loans in the Economy.

Secondary data was obtained from the World Bank and the Kenya National Bureau of Statistics.

The research employed a time series correlation study. SME finance, the dependent variable,

was correlated with the annual rates of changes in lending by commercial banks as presented in

financing arrangements of commercial banks. The data on SME finance (SMEF) and the ratio of

SME loans to the total credit in the economy(SMETC) was obtained from the Kenya National

Bureau while the data on Commercial banks return on equity of the 43 commercial banks in Kenya

was obtained from the World Bank. The data used covered a 10-year period from 2003 to 2012

and covered all the 43 commercial banks. SME finance was regressed against rates of change in

amounts lent by commercial banks lagged one year. The study found out that the ratio of SME

loans to total credit in the economy has been declining over the years. On the other hand,

commercial banks return on equity increased thereby increasing the amount of SME finance.

The study recommends that a further research could also be done to look into different financing

strategies adopted by commercial banks in serving the SME sector.

Keywords: Small and Medium Enterprises, Commercial Banks return on equity, SMEs Financing