IMPACT OF CREDIT REFERENCE BUREAUS ON NON-PERFORMING LOANS: A SURVEY OF COMMERCIAL BANKS IN KENYA

Abstract

Lending is the main business of financial institutions and loans is naturally the main asset and major source of revenue for Banks. Despite the huge income created from lending, available literature shows that huge shares of bank loans are defaulted thus affecting financial performance of these institutions. The main objective of this study was to find out the impact of credit reference bureaus on non-performing loans of Commercial Banks in Kenya. The Specific Objectives were: To establish the trend of nonperforming loans before introduction of Credit Reference Bureaus; To establish the trend of nonperforming loans after introduction of Credit Reference bureaus and to establish the relationship between credit reference bureaus and non-performing loans. The study was guided by the theory of information asymmetry and employed a longitudinal research design and the target population included all the 43 licensed Commercial Banks in Kenya. Secondary data was used in the study. Data was collected from the annual Central Bank of Kenya reports between 2005-2014. Modeling was done using Anova to find out if there is a relationship between credit reference bureaus and non-performing loans. The study findings indicated that the trend of Non-PerformingLoans has reduced since the year 2005-2014. However there is no significant relationship between Credit Information Sharing and Non-PerformingLoans (p=0.868654). Also the mean (M=0.688) shows there is no significant relationship between Credit Information Sharing and Non-PerformingLoans. In addition Non Performing Loans and Credit Information Sharing were highly correlated and inversely proportional. However, this correlation was not significant. This study shows that the number of nonperforming loans has gone down since the inception of Credit Reference Bureaus because now Commercial Banks can access information of people and companies which have defaulted. The study recommends, among other things establishment of more companies information sharing and capacity building of Credit Information Sharing firms to adequately provide for its increasing clientele base. The study ends by suggesting a further research to be conducted to explore the impact of Credit Information Sharing on the economic well being of small and medium sized enterprises (SMEs), as well as Savings and Credit Companies (SACCOs) and Higher Education Loans Board (HELB).