Credit information sharing, bank characteristics and credit market performance in Kenya
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Date
2014
Authors
James, Rosemary Muthoni
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Efficient credit markets are essential for economic growth and development. However,
asymmetric information between borrowers and lenders results in inefficient allocation of
credit and credit rationing. In Kenya, information asymmetry has led to the high cost of
credit that has constrained the expansion of businesses and deterred access to credit by a
significant proportion of Kenyans. Further, this information asymmetry problem has also
been a contributory factor to the high levels of Non-Performing Loans (NPLs) in the
Kenyan banking sector. It is in this regard that the government licensed Credit Reference
Bureaus (CRBs) to reduce problems of information asymmetry by facilitating credit
information sharing. With the roll-out of credit information sharing effective 31st July
2010, it was envisaged that the benefits of credit information sharing would start accruing
from the middle of the subsequent month after the initial submissions; banks would start
accessing credit reports from mid August 2010 for loan appraisals and customers would
start accessing their credit reports at the same time. Given the recent entrance of CBRs
into the credit market in Kenya, the emerging question is whether or not the introduction
of credit information sharing has contributed to credit market performance. This study
therefore sought to provide an empirical investigation of the impact of credit information
sharing on credit market performance in Kenya. Specifically, the study investigated
whether credit information sharing has improved credit market performance through
reduced default rate, increased availability of credit and reduced cost of credit. Both the
explanatory and descriptive research designs were used. The target population were the
43 financial institutions that are licensed under the Kenyan Banking Act. A census of the
43 financial institutions was carried out where both primary and secondary data was
collected. Semi-structured questionnaires administered to the credit managers at the
headquarters of each of the commercial banks were used to collect primary data.
Secondary data pertaining to default rates, credit availability and cost of credit were
collected on the same banks for a period of five years between 2008 and 2012 recorded
on a quarterly basis. CRBAfrica provided data on the intensity of use of the credit reports
by different banks. Descriptive statistical analysis of frequencies, percentages, means and
cross-tabulation analysis provided a summary of the variables while panel data regression
models were used to establish whether introduction of credit information sharing in
Kenya has had an impact on the credit market performance. Open-ended questions were
analyzed by grouping the common themes together and drawing conclusions from the
findings. The research findings showed that credit information sharing affected the
performance of the credit market. The study also established that there was differential
impact of credit information sharing by ownership structure, bank size and bank age. The
study concludes that the presence of credit information sharing lead to a reduction in the
default rates and an increase in credit availability. However, it failed to impact on the cost
of credit as the interest rates increased even with the introduction of credit bureaus. The
study therefore recommends that the government should extend credit information
sharing beyond the banking sector and also facilitate sharing of both positive and
negative information. There is also need to sensitize the financial institutions on the
benefits of credit information sharing. Finally, there is need for the government and the
financial institutions to find ways of reducing the cost of borrowing in the country.
Description
Department of Management Science, 173p. 2014