The Effect of Credit Information Sharing on Profitability of Commercial Banks in Kenya

Abstract

Credit Information Sharing has the impact of minimizing the default risk and therefore motivating Banks to create more credit for firms and consumers. Sharing of credit information drastically reduces adverse selection cases by availing credit profile of the borrowers enhancing the banks allocation of credit efficiently through improved credit risk assessment. The study sought to the effect of credit information sharing on profitability of commercial banks in Kenya and a descriptive research design was used. The population for this study was all the 41 commercial banks operating in Kenya. A census approach was used in this study to allow all commercial banks to be included in the study since the number is small and reachable. This study obtained secondary data, where data was from CBK banking supervision reports. A bivariate regression analysis was used to establish link between the variables. Trend analysis was carried out to identify the movement of profitability and request of credit reports among commercial banks. The study concludes that there was a strong positive relationship between profitability as measured by return on assets and credit information sharing. This is because the price of credit continually goes down with increase in the levels of information sharing. The study established a negative relationship between non- performing loans to gross loans ratio and profitability. This is because increase in credit information sharing reduces the level of non- performing loans. Association between interest rate and bank profitability was strong, positive and statistically significant. This was because high risky borrowers would be charged high interest rates. There was a strong positive relationship between volume of lending and profitability of commercial banks since the loan collection is the major assets of banks and the predominate source of revenue. Finally, specific loan provisions to total loans provisions and banks profitability was strong positive and significant. The study recommends that banks should continue to utilize credit information sharing as they reduce transaction costs involved in identifying suitable clients that the bank can advance loans to. The study recommends that banks should utilise credit information sharing service as they reduce loan default. The study recommends that the Central Bank of Kenya should regulate the interest rates charged across the commercial banks to different borrowers. The study recommends that commercial banks should ensure that as they increase their volume of lending they should carefully screen their customers.