Influence of Credit Reference Bureau on Loan Default Strategies: a Case of Commercial Banks in Kenya

Abstract

The objective of this study was to determine the influence of credit reference bureau on loan default strategies using a case of commercial banks in Kenya. In Africa, the concept of CRB has had its practice in few selected countries by multilateral companies through private credit bureaus such as Compuscan which operates in Botswana, Namibia and Rwanda while Kutz Univar, operate in Tanzania, Kenya and Uganda. The information obtained from the research would be of a very much importance to both the Government, Central Bank and in particular the Ministry of Finance Kenya to enhance credit information sharing. This study will employ Credit Rationing Theory, Adverse Selection Theory and Model of Credit Information Sharing design. Based on literature review, the study notes that if mitigation of credit risk are inadequately handled, the respective commercial banks are subject to loosing financially, increased capital recovery costs, and social role failure due to inability to provide loans to the society aiming at improving and boosting their living standards. The researcher will descriptive research is description of state of affairs as it exists. It is a method of collecting information by interviewing or administering a questionnaire to a sample of individuals. The target population of the study consisted of all the 44 licensed commercial banks in Kenya and the three credit reference bureau under the Banking Act. The researcher used census method for the research and was composed of all commercial bank headquarters credit managers. To collect primary data, the researcher used questionnaires. Besides, Secondary data required for this study collected from CBK loan books and CBK annual Bank supervisory reports. To ensure validity, questionnaire was prepared in conjunction with literature review and based on the research objectives and questions. Its content validity was pre-tested by a pilot study. The researcher acquired a research data collection letter from the University. The researcher maintained confidentiality at all times, be responsible for the work and for the contribution to the whole study. On completion the researcher organized the data received, coded, edited and tabulated to check accuracy, completeness and storing it in appropriate form. The data was presented using graphical systems which will include histograms and pie chart, frequency distributions tables and numerical methods. This study found out all the respondents (100%) had a large access to credit information from the credit information bureaus. This is reveals that both banks have embraced the introduction of credit information sharing and thus for lending to take place due diligence has to be done through sharing of information through the Credit Bureaus. This study notes that regarding the extent of effectiveness of credit information sharing on the banking industry in Kenya, the study found that thus far credit information has been effective, but it can be concluded that it is effective but only to a small scale to date. This conclusion is supported by the fact that Credit Reference Bureaus had an impact on the extent of effectiveness of credit information sharing on the banking industry in Kenya as was agreed by many respondents. This study recommended that in the process of managing loan defaults, this study recommends the registration of more Credit Reference Bureaus by the relevant authorities, because of diversity of Credit information.”