Intra- Organizational Knowledge Transfer in the SME Lending Process: A Study of Commercial Banks in Kenya

Relationship lending has been posited as the preferred methodology for banks to employ especially when engaging with small and medium enterprises (SMEs), due to the information opacity that characterizes these firms. Relationship lending relies on 'soft' data (i.e. information about management skills, management ethics and moral principles, etc.) gathered over the course of a relationship with the borrower. However, banks interested in employing this method need to invest in a process of knowledge acquisition, transfer, processing and use that is quite peculiar. Existing literature gives a lot of attention to defining and measuring relationship lending. However, even though extant literature recognizes the importance of soft information, particularly for lending to SMEs that are characterized by high levels of opacity, it does not pay attention to how soft information is transferred from the borrower to the lender and how this process enriches lender knowledge about the borrower. This study investigates the process of loan manager knowledge formation about the borrower by focusing on the role played by soft information. By relying on the Inter-Organizational Knowledge Transfer framework proposed by Easterby-Smith, Lyles and Tsang, this paper investigates the interaction of loan managers' trust in the borrower, the social ties in which the lender-borrower relationship is embedded, and the bank structure within which the transfer of soft information occurs from the borrower to the lender. A qualitative multiple case study of selected commercial banks in Kenya is employed to gain an in-depth understanding of how knowledge is transferred from the SME client and eventually used in making the lending decision. Data is collected through semi structured interviews conducted with SME relationship managers who work closely with SMEs and are thus able to articulate the process from the onset of the relationship to disbursement of a loan. The results suggest that when dealing with SMEs, banks make use of both soft and hard information to make a lending decision. Actually and very interestingly a very important role of soft information emerges since in most cases bank managers are interested in understanding the soft factors before they consider the hard information. The loan manager is tasked with capturing the soft information and transmitting information from an informal platform to a formal scale that enables scoring so that an eventual lending decision can be made.