Impact of Digital Banks on SME Lending: A Case Study of Kenya's Market Leaders

Thesis Abstract

The rapid expansion of digital banking platforms in Kenya has altered the traditional SME financing landscape, shifting access to credit from conventional brick-and-mortar banks to agile, technology-driven lenders, while raising questions about risk, pricing, and inclusive growth. This study investigates the impact of digital banks on SME lending in Kenya, addressing the problem of limited understanding of how digital channels influence lending volumes, approval times, credit terms, and borrower outcomes within a high-penetration mobile money environment. The aim is to examine how digital banks affect SME access to finance, loan performance, and financial inclusion, with specific objectives to (1) quantify changes in SME loan approval rates and average tenors pre- and post-adoption of digital banking platforms; (2) analyze the influence of digital credit scoring, alternative data, and platform interfaces on loan approvals for micro, small, and medium enterprises; (3) assess the effect of digital lending on repayment performance, default rates, and portfolio quality; (4) identify the regulatory, operational, and competitive factors shaping digital SME lending in Kenya; (5) propose a framework for best practices in digital SME lending from the perspective of market leaders. The study adopts a mixed-methods design rooted in resource-based view and institutional theory to triangulate quantitative and qualitative insights. The population comprises SME borrowers and relationship managers from three leading Kenyan digital banks operating in Nairobi and Mombasa, complemented by data from five conventional banks for benchmarking. A stratified random sample of 400 SME loan accounts (200 digital-bank borrowers and 200 from conventional banks) will be analyzed, alongside 30 in-depth interviews with credit officers, 12 SME owner-managers, and 6 regulatory officials. Data collection combines bank-obtained loan performance records, 2023–2025 quarterly lending dashboards, and semi-structured interviews, supplemented by a survey instrument adapted from the World Bank Enterprise Surveys to capture inclusion dimensions. Validity and reliability will be ensured via pilot testing, confirmatory factor analysis for constructs related to digital lending quality and borrower experience, and inter-rater reliability checks for interview coding. Quantitative analysis will employ multivariate regression to examine determinants of loan approval likelihood and repayment performance, difference-in-differences to isolate digital banking effects on lending outcomes, and survival analysis for time-to-default metrics. Qualitative data will be analyzed using thematic analysis guided by Braun and Clarke’s approach to identify patterns in borrower experiences, platform usability, and lender risk management. A conceptual model will map digital-bank-enabled variables (data quality, credit scoring sophistication, user interface, disbursement speed) to SME outcomes (access, cost of funds, default risk, and growth). It is anticipated that digital banks will significantly increase loan approval rates and reduce average processing times, with mixed effects on pricing and credit risk due to enhanced data-driven underwriting and borrower sophistication. Expected findings include higher SME access for underserved segments, faster disbursement cycles, and improved portfolio quality where digital platforms deploy robust risk analytics and continuous monitoring. The study will contribute to knowledge by integrating theory-driven insights from resource-based theory and technology-enabled lending literature with empirical Kenyan data, offering a nuanced understanding of digital banking’s role in SME finance and identifying context-specific success factors and risks. Policy and practice implications include recommendations for regulators to harmonize data-sharing, consumer protection, and digital credit scoring standards; for banks to align risk management with dynamic underwriting models; and for policymakers to promote financial inclusion through interoperable digital infrastructure. The conclusion will emphasize the transformative potential of digital banks in expanding SME credit while cautioning against overreliance on non-traditional data without robust governance. Recommendations will address enhancing data interoperability, improving transparency of pricing, investing in borrower financial literacy, and developing sector-specific SME credit products tailored to Kenyan market dynamics.