Factors influencing credit rationing by commercial banks in Kenya

Abstract

Bank credit refers to loans and overdrafts extended to enterprises by formal banking institutions. Bank credit is among the most useful sources of finance for business in Kenya, the provision of credit has increasingly been regarded as an important tool for raising the incomes, mainly by mobilizing resources to more productive uses. As development takes place, one question that arises is the extent to which credit can be offered by commercial banks. Although Commercial banks have a primary role of providing credit ,there is historical evidence of credit rationing even to creditworthy borrowers by commercial banks all over the world Only 1.5 percent of MSEs receive loans from commercial banks in Kenya (International Centre for Economic Growth 1999). It is unclear, how the rest, who form the majority, meet their working and investment needs (Kimuyu and Omiti 2000). The existing literature has not captured the factors that make commercial banks to ration credit even to the creditworthy borrowers. This study intends to fill that gap. The objective of his study was to examine the factors influence credit rationing by commercial banks in Kenya. Descriptive research design was used in the study. The target population from which the sample was drawn is Commercial banks within Nairobi region. A representative sample was drawn using the Proportionate Stratified random sampling. Both primary and secondary data was used in the study. Secondary data was obtained from books and internet while the primary data was collected through the questionnaires which were administered to the credit analysts based at the head offices of the commercial banks sampled. Data collected was validated, edited and coded then analyzed using descriptive statistics with the aid of Statistical Package for Social Sciences (SPSS).Data presentation methods used were tables, charts and diagrams. The study established that the key factors that influenced credit rationing by commercial banks in Kenya are information asymmetry, level of debt in bon-ower's capital structure and the amount of collateral. Some of the recommendations that the study made were that that it is beneficial for banks to ration credit but i should be done with professionalism and with no biasness, the factors that influence rationing of credit should be evaluated thoroughly by the person in charge and given priority before issuing credit. And the Banks should find out more about credit rationing and how it can contribute to their business growth.