Credit Information Sharing and Default Rate of Loans Issued by Commercial Banks Listed at the Nairobi Securities Exchange
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Date
2020
Authors
Saruni, Lelaono Alois
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
The strength of banking systems is key in the stimulation of economic growth and
development, creation of employment, domestic and foreign investment and poverty
reduction. The banking sector in Kenya has been earmarked as a core pillar for the
realization of Vision 2030 of making Kenya a middle-income nation through the
provision of financial services and promoting macro-economic stability. From 2013 to
2019, the default rate demonstrates a loan default increase in the Kenyan banking
industry. The expanding level of default rate among Kenyan business banks has troubled
different partners and general society generally. Increasing levels of credit default rates
diminishes the liquidity of banks, their productivity and in this way their profitability.
This investigation subsequently related credit data sharing contribution on default rates of
credits given by banks in Kenya with reference to client credit reports sharing, client
credit reports pulling and expenses of credit data sharing. The investigation is pegged on
the information asymmetry hypothesis, the adverse selection hypothesis, moral hazard
hypothesis lastly the hypothesis of credit information sharing. This research embraced an
explanatory research plan targeting all 12 banks listed at the NSE and source data from
their reports. Customer credit reports shared, customer credit reports pulled and costs incurred
on credit information sharing explained 80.72% of default rates of loans issued by listed
commercial banks. Panel regression of coefficients findings indicated that customer
credit reports sharing is negatively and significantly related to default rates on loans (β =-
0.0446, p=0.000). Customer credit reports pulling and default rates of loans issued by
listed commercial banks have a negative and significant relationship (β =-0.03351,
p=0.008) while costs incurred on credit information sharing has a positive and significant
relationship (β =0.098018, p=0.000) with default rates of loans issued by listed
commercial banks. Bank size has a moderating effect of bank size on credit information
sharing and default rates of loans issued by listed banks in Kenya since R2 rose from
0.8072 before moderation to 0.8615 after moderation. The study concluded that customer
credit reports sharing, customer credit reports pulled and costs incurred on credit information
sharing affects default rates of loans issued by commercial banks. This study recommends
that commercial banks may need to adopt credit scoring methods to facilitate efficient
pulling of credit information from potential loan borrowers. With the adoption of credit
scoring, a bank is able to extract information from the main credit bureaus and apply a
proprietary algorithm in assessing the risk profile of each applicant. Commercial banks
may need to come up with an integrated information system for ensuring that customers
get prompt notification on their loan status and any other information. All commercial
banks management ought to put emphasis on operational efficiencies as a way of
eliminating redundant operational cost and as a result improving financial performance.
The study suggests the need for future studies to investigate other exogenous factors
influencing default rates among borrowers in commercial banks
Description
A Research Project Submitted to the School of Business in
Partial Fulfillment of the Requirement for the Award of
the Degree of Master of Business Administration (Finance
Option) of Kenyatta University
Keywords
Credit Information Sharing, Loans Default Rate, Commercial Banks, Nairobi Securities Exchange, Banking systems, Credit data sharing, Customer credit reports, Kenya