Credit Referencing and Loan Repayment in Kenya

Abstract

Credit referencing refers to a financial system regulated by the government (Central Banks) that involves gathering and maintaining data on credit history of individuals, businesses and other organizations and makes this information available to relevant users. This is undertaken by the Credit Reference Bureaus (CRBs), whom under reciprocity agreement with the lenders and other entities obtains, consolidates and package this information into individual reports and distributes it to lenders at a fee. Despite the decade-long existence of CRBs in Kenya, lenders continue to grapple with the NPLs menace although it has been reported elsewhere that credit referencing has led to reduction in NPLs. This is however empirically disapproved by the consistent rise in NPLs within the banking sector to date. This contrast has motivated a follow-up study to establish the accurate position. The study sought to investigate how credit referencing influences the Non-performing loans stock levels among the Kenyan lenders and was anchored on information asymmetry, the adverse selection theory and the Moral Hazard theory. The study adopted descriptive survey research design and targeted the 39 operational commercial banks and 14 MFBs in Kenya as at 31st Dec 2020. The study selected 21 commercial banks using stratified sampling plan based on the 3 existing tiers as defined by the Central Bank of Kenya and also included four MFBs. Respondents comprised Branch managers or Credit Officers. The study used questionnaires to collect primary data on the independent variable and a data collection sheet to collect Secondary data on the dependent variable. Results showed that credit referencing parameters were negatively but insignificantly related with NPLs levels. Consequently, it is recommended that the management of the Banks should not downplay adverse credit information relating to borrowers. The banks need to operationalize differentiated credit pricing models to reward borrowers with good credit history while the Central Bank should institute appropriate sanctions and strengthen supervision (M&E) on NPLs trends among the lenders. In addition, the CRBs should carry out more campaigns to sensitize the borrowing public on the key benefits of credit information sharing.