Relational Transaction Lending? A Study of Commercial Banks in Kenya

The importance of small and medium enterprises (SMEs) in economies has been widely researched, with access to finance emerging as one of the important constraining factors that has to be and is being addressed to enable these firms attain their maximum potential. When financing SMEs, commercial banks can either engage in transaction and/or relationship lending. Traditional literature emphasizes the use of the relationship lending methodology when dealing with SMEs because these firms are considered informational opaque and lack collateral. However, recent evidence shows that transaction-based or arms-length lending can be more cost-effective and also allows larger and non-local banks to lend to SMEs. The objective of this study is to determine how banks make the decision on the lending method to employ when contracting with SMEs. Qualitative research methodology is employed to gain an in-depth understanding of how SME lending transpires in commercial banks in Kenya that lend to SMEs. The data is collected through semi structured interviews and analysed using content analysis. The results indicate that commercial banks employ a mix of relationship and transactional lending technologies when contracting with SMEs and not one method exclusively. The study concludes that we cannot say that any bank employs relationship lending but perhaps, “relational transaction lending”.