Credit Information Sharing and Default Rate of Loans Issued by Commercial Banks Listed at the Nairobi Securities Exchange
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Date
2020-11
Authors
Saruni, Lelaono Alois
Koori, Jeremiah
Journal Title
Journal ISSN
Volume Title
Publisher
Stratford Peer Reviewed Journals and Book Publishing
Abstract
The strength of banking systems is critical 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 while 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 study investigates the effect 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 study is pegged on the information asymmetry theory, the adverse selection theory,
moral hazard theory lastly the theory 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 R
2
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 Article in the Journal of Finance and Accounting
Keywords
Customer credit reports sharing,, Customer credit reports pulling, Costs of credit information sharing, Bank size, Default rates of loans
Citation
Saruni, L., A. & Koori, J. (2020). Credit Information Sharing and Default Rate of Loans Issued by Commercial Banks Listed at the Nairobi Securities Exchange, Journal of Finance and Accounting, Vol. 4(5), 1-24.