The Effect of Credit Information Sharing on Non-performing Loans of Commercial Banks in Kenya

Abstract

Commercial banks in Kenya have been using information from Credit Reference Bureaus (CRBs) to make lending decisions. However, despite the use of credit information sharing among commercial banks, non-performing loans still remain a challenge. This is shown by the increasing non-performing loans ratio. The objective of the study was to determine the effect of credit information sharing on the non-performing loans among Kenyan commercial banks. The study adopted an explanatory research design. The target population was therefore all the 39 commercial banks in Kenya that are currently operational. Census survey was used. This research study made use of secondary panel data. In this study, secondary data was obtained from the annual reports of individual commercial banks as well as the Central Bank of Kenya. The data was collected by use of a data collection checklist. Data gathered using a checklist was in panel form as it comprised of 39 commercial banks. Both descriptive and inferential statistics was used in the analysis of data with the help of statistical software known as STATA version 14. Descriptive statistics included mean, percentages, frequency distributions and also standard deviation. Inferential statistics included correlation analysis and regression analysis. The study found that credit information sharing has a significant effect on the non-performing loans among Kenyan commercial banks. Specifically, the study found that credit reports shared and credit reports shared have a negative and significant effect on the non-performing loans among Kenyan commercial banks. The study revealed that capital adequacy has a negative and significant effect on the non-performing loans among Kenyan commercial banks. However, the study found that lending interest rate, liquidity ratio and credit growth has no significant effect on non-performing loans for commercial banks in Kenya. The management of financial institutions should use the information obtained through credit reports to make informed lending decisions. This includes assessing the credit risk of potential borrowers and tailoring lending terms based on their credit history. By promoting responsible lending practices, banks can minimize the likelihood of non-performing loans. The study also recommends the management of the banks should provide continuous training to banking staff on the importance of credit information sharing and how to interpret credit reports. Policies should facilitate the sharing of accurate and comprehensive credit information among financial institutions, ensuring that the regulatory framework is conducive to responsible credit reporting. Policymakers should develop and enforce policies that ensure customer consent for the sharing of their credit information.