Effect of Credit Information Sharing on Non-performing Loans of Microfinance Banks in Kenya

Abstract

Information sharing in the credit market is a relatively new concept in most developing or emerging markets. In various developing countries, credit information systems are still in their infancy, and information sharing among banks remains weak. Credit reference bureaus were introduced in the Kenyan banking sector to facilitate the concept of credit information sharing and to mitigate information asymmetry and credit risk. This study seeks to determine the effect of credit information sharing on non-performing loans of micro-finance banks in Kenya. The independent variable for the study is credit information sharing whereas the dependent variable is non-performing loans and the control variables includes interest rates, inflation and economic growth. This study employed a descriptive research design. The population of this study entailed all the 11 microfinance banks registered by the Central Bank of Kenya. This study used secondary data analyzed using descriptive and inferential statistics. The study found that credit information sharing had a significant negative relationship with non-performing loans whereas. The study concluded that there is an inverse significant relationship between credit information sharing and the level of nonperforming loans and that an increase in interest rates increases the level of nonperforming loans while low economic growth also adversely affects the level of nonperforming loans. The study also concluded that there is a direct relationship between inflation and the level of nonperforming loans of microfinance banks in Kenya. The study recommended that leadership of microfinance banks should enhance the sharing of credit information to ensure that they reduce the levels of nonperforming loans in their banks.