| Abstract: |
Data from the Central Bank of Kenya show that, in the 12 months to December
2024, the banking sector generated approximately 35.3% of its overall
lendingrelated income from the MSME sector, almost half of which was from
small and microenterprises (SMEs). During the same period, banks and
microfinance banks extended less than 20% of their combined credit to SMEs.
This paper explores reasons for the suboptimal lending by banks to SMEs using
an analytical framework that draws from the literature and lending practices
in different contexts. The major reasons for suboptimal SME lending by banks
include perception of higher risks and inadequate institutional arrangements.
The paper makes several recommendations at the policy level and at the bank
level to address the identified problems. |