Effects of Listing of Loan Defaulters by Credit Reference Bureaus on Non-performing Loans of Commercial Banks in Kenya

Abstract

Banks face a major threat when incidences of Non-Performing Loans (NPLs) increase. NPLs represent bad loans that the borrowers engage in and fail to obey the repayment obligations. NPL affects the psychology of a banker in terms of their funds disposition towards credit delivery and expansion. As such non-performing loans generate a vicious effect on banking survival and growth which if not timely managed in a proper way may lead to banking failures. In Kenya, due to the high banking failures, credit information sharing mechanism was launched in July 2007. This gave birth to credit reference bureau. The use of CRB extends to sharing information merged from other sources such as criminal records, tax records. All these data of information is compiled together and used to assign credit scores of borrowers based on statistical risk analysis. It is expected that use of CRB would reduce giving loan to risky customers. This study sought to establish the effect of listing loan defaulters by credit reference bureaus on the level of nonperforming loans in commercial banks in Kenya. The study used a descriptive survey design, targeting all commercial banks in Kenya. A census of all commercial banks in Kenya was done. Secondary data was used in this study. The research obtained quantitative data. Descriptive and inferential statistics was employed in data analysis with aid of the Statistical Package for Social Sciences (SPSS) package. The study revealed that that there existed a negative relationship between the level of non-performing loans in commercial banks and listing of loan defaulters. The study also established that an increase in interest rate weakens loan repayment capacity of the borrower therefore nonperforming loans and bad loans are positively correlated with the interest rates. Further, it was established that a bank‟s size indicates a higher likelihood of a diversified loan portfolio, the capital of banks serves as a custom for protection of depositors‟ funds. Finally, the study established that a rise in inflation led to a decrease in the amount of non-performing loans. The study recommends that commercial banks in Kenya should assess their clients and charge interest rates accordingly, as ineffective interest rate policy can increase the level of interest rates and consequently NPA. Commercial banks should also apply rigorous policies on loan advances so as loans are awarded to those with ability to repay and mitigate moral hazards such as insider lending and information asymmetry. Banks should apply efficient and effective credit risk management that will ensure that loans are matched with ability to repay, no or minimal insider lending, loan defaults are projected accordingly and relevant measures taken to minimize the same. The banks should also enhance periodic/regular credit risk monitoring of their loan portfolios to reduce the level of NPA.