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

Abstract

Credit information sharing (CIS) is a mechanism that allows credit institutions that includes Commercial banks, Microfinance banks; credit only microfinance (MFIs), SACCOs and other credit providers of goods and services to share credit data on their customer’s payment performance. This study sought to determine the effect of CIS on NPLs of Kenyan commercial banks. Secondary data required for this study was collected from CBK loan book, CBK annual bank supervisory reports, and was used in the analysis. The data required was compared in two faces: 2006 to 2010 and 2011 to 2015. Data collected for both depended, independent and moderating variables included; Total gross loans, Loan loss provisions, Non-performing loans, No of credit file/reports shared. The study findings establish a significant difference between NPLs before and after credit information sharing. The study findings showed that CIS accounted for 73.9% changes in nonperforming loans in commercial banks loan book in Kenya. The study recommended that, the government needs to strengthen credit-information regulations and include other credit providers like SACCOs, MFIs, DFIs, utility firms like water and electricity suppliers and providers of goods and services to join the mechanism. The study also concludes that there is need to put in place specific initiatives to create awareness to consumers and increase financial literacy on the benefits of CIS. The study also recommended an analysis of credit information sharing on financial inclusion. This follows from the fact that the World Bank Ease of Doing Business Report for 2015 indicated that Kenya has moved from globally position 128 to position 28 on financial inclusion over the period 2010 to 2014 and position 28 to 3 on the African Continent over the same period. Although this points to the effect of CIS, a clear study is recommended here in order to establish the specific drivers that have impacted on this situation.