An investigation of factors affecting loan supply by Commercial Banks in Kenya

Abstract

Banks mobilize, allocate, and invest much of society's savings, so bank performance has Substantive repercussions on capital allocation, firm growth, industrial expansion, and economic development. Thus, research on factors affecting loan supply in Commercial Banks and especially on the credit department has important policy implications. This study will investigate the factors affecting loan supply in Commercial Banks in Kenya. Specifically, the study will be determining whether credit policies, interest rates, credit information sharing and competition has any effect on loan supply in Commercial Banks in Kenya. Descriptive survey was used in this study. The population of study consisted of all the 43 commercial banks that were fully registered with Central Bank of Kenya by June 2011. The questionnaire will consist of both open ended and closed ended questions so as to capture the objectives of the study. Data was analyzed by descriptive analysis. Tables and charts were used to summarize responses for further analysis and facilitate comparison. The findings show that majority disagreed that the borrower complies regularly with agreed terms and conditions. Majority agreed that high default rate was witnessed when interest rate was high. The study concluded that credit policies administered by the banks in lending loans affected loan supply. For instance stringent credit policies such as credit worthiness, delays in loan processing, interest rates and security/collateral needed. It was evident that high default rate was witnessed when interest rate was high. The study further concluded that most of the respondents were neutral that business information sharing allows the bank to collaboratively manage credit risk. Thus the researcher recommended that Commercial banks and other formal institutions should provide credit policies that will cater for the credit needs of all consumers mainly their lending terms and conditions. Secondly commercial banks should exchange information about their customers, since it will help them improve their knowledge of applicants' characteristics, past behavior and current debt exposure.