The effect of credit information sharing on the cost of credit of commercial Banks in Kenya

Abstract

The purpose of credit ratings and credit information sharing is to attempt to reduce information asymmetry, reduce non-performing loans, build information capital and generally enhance access to affordable credit in the economy. This study sought to establish the effect of credit information sharing on the cost of credit of commercial banks in Kenya. The research adopted a descriptive research design and used secondary data to analyze all 43 licensed commercial banks operating in Kenya as per the CBK list of commercial banks as at end of December 2013. The f – tests at 95% confidence level was used to determine the statistical significance of the constant term, and the coefficient terms of the regression model. The study found that cost of funds and operating costs as factors contribute positively to the cost of credit of commercial banks while credit information sharing and credit default risk made relatively insignificant contribution to determining the cost of credit. The model shows that for every one unit increase in credit report shared, cost of credit decreased by 0.0073 (insignificant). The study further concluded that in the Kenyan banking industry, credit information sharing is undertaken not with an aim of reducing cost of lending but for other reasons such as avoiding bad customers and reducing risk exposure. The study recommends that cost of funds and operating costs being major determining factors in cost of loans by commercial banks in Kenya be actively scaled down so as to make credit in the country more affordable to the customer base at large. This will have a positive impact on the total loans advanced and thus subsequent higher returns in terms of wider customer base. Concerted efforts, including policy shift is also required to encourage use of credit information sharing in assessing credit history of customers and hence reduce cost of credit by banks.