Factors Influencing the Performance of Loan Collection by Commercial Banks Through Outsourcing of Non-performing Loans to Private Firms: a Case of Barclays Bank of Kenya Limited,nairobi

Abstract

Banks are among the largest lenders of retail, commercial and corporate entities. Aside from deposit taking, lending forms a major part of banks income generating activities which means that depending on how lending as a business activity performs, the concerned bank may either make profits or losses. A loan that falls in default before its maturity, known as a non-performing loan is one of the ways that a bank can get into losses even when the risk has been calculated and predetermined. It has been noted by world bank and other notable sources that loses arising from non-performing loans keep rising in the Kenyan retail banks. If not well addressed, these loses can eventually lead to a gradual rise in the cost of credit for future borrowers which would push access to credit beyond the reach of many small and medium scale enterprises as well as individuals. With access to credit being a critical factor of economic growth, such an outcome can greatly affect the general economy. However, the loses from non-performing loans can be mitigated or reduced by using aggressive collection strategies where the banks or the affected lenders would use either their own in-house collection systems or outsource the services to firms that specialize in debt collection. The success in recovery of the otherwise bad debts will be determined by how effective the chosen system is. This study therefore sought to investigate how effective outsourcing of debt collection is to banks that elect to use that strategy in recovery of their non-performing loans. The study was guided by four specific objectives that included; to establish how a private debt collection firm’s experience influences collection of non-performing loans; to assess the influence of credit information sharing on the collection of non-performing loans; to analyze the influence of private firms spread into different geographical locations on the collection of non-performing loans and to examine how remuneration of staff by private collection firms influence the collection of non-performing loans. The study which adopted a descriptive research design was undertaken using Barclays bank of Kenya Ltd as the case study and the findings were envisioned to be useful in guiding how similar organizations in the business of lending can best tackle the challenge of a growing non-performing loan portfolio. The researcher selected a sample of 48 respondents from Barclays bank and 11 respondents from Quest Holdings Ltd using stratified random sampling. The study employed use of questionnaires and interview schedules to obtain primary data. Data analysis tools used included SPSS and Microsoft excel which gave statistical output in form of percentages, tabulations, means and other central tendencies. Tables were used to summarize responses for further analysis and facilitate comparison. Regarding how a private debt collection firm’s experience influences collection of non-performing loans, the study concludes that by outsourcing, the bank is able to access best business practice, expertise, technology and other resources that may be too expensive and unjustified to be built internally or hired on full time basis. Further the study concludes that collection staff of a private debt collection firm are adequately trained in collection and recoveries before being deployed to work and that their long years of operations gives them an upper hand for the tasks allocated by their clients. On the influence of credit information sharing on the collection of non-performing loans, the study revealed that credit information sharing enhances collection from customers whose contacts may have been lost. The study concluded that the collection firms have a better access to the national database of customer information as compared to the banks collection departments. In addition, there is a stronger collaboration and and easier sharing of information among the debt collection firms which is not possible with the collection departments in the banks. This study therefore recommends that the banking sector should contract debt collection firms because these firms have better trained and experienced staff, access to the relevant technology and enjoy economies of scale hence they are flexible in their location.