Credit Information Sharing Practices and Financial Performance of Commercial Banks in Kenya
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Date
2019
Authors
Odhiambo, Felix Ouma
Ndede, Fredrick W. S.
Journal Title
Journal ISSN
Volume Title
Publisher
IJCAB Publishing Group
Abstract
The banking sector in Kenya suffered increased non-performing credits which prompted collapse
of certain banks with an upsurge of loan defaulters. This was mainly attributed to the continued
information asymmetry in the industry because of absence of a credit data sharing component.
Commercial banks in Kenya have continued to encounter a number of challenges in obtaining
information on customers’ payment history that helps guide on determining their ability to access
and re-pay loan advancements. This has made more commercial banks to subscribe to credit
reference bureaus since its establishment in 2008. As a result, commercial banks in Kenya have
been experiencing high rates of Non-Performing Loans advanced to customers. The general
objective of the study was to determine the effect of credit information sharing practices on
financial performance of commercial bank in Kenya. The study specific objectives were to
determine the effect of information accuracy, volume of lending and customer credit reports on
financial performance of commercial bank in Kenya. The study was anchored by adverse selection
theory, moral hazard theory and asymmetry theory. The researcher used a descriptive research
design. The target population was five banks within Nairobi County including KCB, Equity Bank,
Family Bank, Cooperative Bank and Barclays Bank. Primary data was collected using
questionnaires and secondary data using financial statements of the commercial banks
performance for the past 5 years. Data was analysed using descriptive statistics and inferential
statistics. The study found that information accuracy, volume of lending and customer credit
reports were positively and significantly related to the financial performance of the commercial
banks. The study concludes that information accuracy increases the banks ' understanding of the
applicants’ features and allows a more precise forecast of their probabilities of repayment, it
decreases the information rents that banks could otherwise obtain from their clients and it can
function as a borrower discipline tool. Lending volume enhances business banks ' enhanced
operations, which in turn leads to banks’ enhanced economic results. Sharing of credit information
has made commercial banks grant more loans on the basis of their reputation to deserving clients,
thereby improving their profitability. When extensive consumer credit history information are
easily accessible, it considerably decreases the cost of entering loan markets for fresh lenders,
enhances competition and lowers credit rates. The research recommends that for enhanced results,
all financial institutions in Kenya need to protect the precision of their platforms for data sharing.
Regular site visits should offer credibility to the precision of the borrowers’ data. The data supplied
by CRB should be used efficiently by commercial banks to lend to prospective borrowers. Only
borrowers with a strong history of credit should be permitted access to the loans. The research also
proposes that Kenya's commercial banks should base credit awards on the borrowers’ reputational
assets, ensuring that the loan default rate is small, thus enhancing commercial bank performance
Description
An Article Published in International Journal of Current Aspects
Keywords
Information Accuracy, Volume of Lending, Customer Credit Reports, Credit Information Sharing Practices, Financial Performance of Commercial Banks in Kenya
Citation
Odhiambo, F., & Ndede, F. (2019). Credit Information Sharing Practices and Financial Performance of Commercial Banks in Kenya. International Journal of Current Aspects, 3(VI), 67-82. https://doi.org/10.35942/ijcab.v3iVI.79