Lending technologies and benefits of small and medium enterprise lending: a multiple case study of commercial banks in Kenya
Muriithi-Ollows, Lilian Wangui
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A review of research on bank financing reveals that banks can either engage in transaction and/or relationship lending when financing firms. However, when dealing with small and medium enterprises (SMEs), studies suggest that relationship lending is the suitable methodology due to the information opacity of these firms while transaction lending is preferred for larger firms which are considered more information transparent. Studies also suggest that there are mutual benefits to be gained by both borrowers and lenders when they engage in relationship lending yet most studies emphasize demand side or borrower benefits and largely ignore lender benefits. With the increased interest in the SME sector by commercial banks, it is important to determine supply side or lender benefits if lenders are to continue serving these firms whether by use of the relationship lending method or any other suitable method. The main objective of this study was to determine the benefits that commercial banks gain and the role played by the relationship the bank has with the customer, when they finance small and medium enterprises. Data was collected through semi structured interviews conducted with SME bank managers who work closely with SMEs and analysed using content analysis. The study finds that commercial banks employ both relationship lending and transaction lending when dealing with the SME customer but more importantly establishes that relationship lending is only employed together with transaction lending. This leads to the suggestion of the use of the term “relational transaction lending” when referring to the use of relationship lending as it is always employed together with transaction lending. The study also establishes how soft information is processed for use in the SME lending decision and finally, articulates fourteen benefits that commercial banks are enjoying from engaging in SME lending. In summary, this research has made three significant advances to knowledge through the use of a qualitative research methodology. The development of a conceptual framework for borrower knowledge processing in SME lending; the development of a conceptual framework for the interplay between transaction and relationship lending methodologies resulting in the proposal of the use of the term relational transaction lending and, the establishment of the benefits generated from engaging in SME lending by commercial banks in Kenya.