Factors Influencing Effective Project Financing: A Case of Financial Institutions in Kenya

Abstract

Africa is widely known to have a hybrid of markets that have little or no transparency. The financial institutions have minimal non-stringent disclosure requirements coupled with a public which has scanty levels of financial literacy. Change of interest rate has an effect on distorting the market thereby generating adverse selection. When this happens, the lenders will usually prefer to minimize their risk by offering debt to clients with higher collateral. The effect of this is a situation where financial intermediation is hampered. Throughout the year, the Private sector credit growth has been declining to close at an 8-year low of 4.3% in 2016, compared to 20.6% in 2015, not picking up even after the interest rate was changed. This was below the CBKs recommended 12-15% growth required to support economic growth and stable job creation. Once the change of the interest rates was effected, banks in Kenya have increasingly preferred to provide debt to the public sector more; the lending recorded a 10.9% increase in 2016. This study purposed to examine the factors influencing effective project financing by financial institutions in Kenya. The specific objectives of the study were to establish the impact of credit risk, credit policy, credit management practice and collateral security on the effective project financing by financial institutions in Kenya. The study utilized descriptive survey research approach. The study focused on commercial banks registered in Kenya. The target population was the top-level chief credit executive, mid-level chief credit executives and credit managers of the 44 financial institutions in Kenya which brought to a total of 132. Since the population of this study was small, census approach was used. The response rate was 91.67% representing a total number of 121 respondents out of 132 questionnaires that were distributed. SPSS was used to code and analyze the data. Correlation result of the study revealed that credit risk, credit policy, credit management and collateral security had a positive and significant association with effective project financing. A multivariate regression model was used for purposes of testing the significance of the impact the independent variables had on the dependent variables and therefore credit risk, credit policy, credit management and collateral security related factors were computed into single variables per factor by obtaining the averages of each factor. Results of regression revealed that credit risk had a positive and significant effect on project financing due to interest rate. (B=0.115, p=0.000); credit policy had a positive and significant effect on project financing. (B=0.17, p=0.000); credit management had equally a positive and significant effect on project financing (B=0.073, p=0.025.). Finally, collateral security had a positive and significant effect on project financing (B=0.149, p=0.000). The study concludes that Credit Risk, Credit policy, Credit Management and Collateral Security had a positive and significant effect on effective project financing. The study recommends that commercial banks should adjust their credit policy models which are resulting in declining financial intermediation thus directing their lending in favour of large corporate borrowers and Government thus shunning small and risky borrowers. This will ensure plain playing field for both small and large borrower’s hence smooth running of projects.

Key Words: Credit Risk, Credit Policy, Credit Management, Collateral Security, Project Financing