Impact of credit referencing practices on lending in financial institutions

Abstract

Credit referencing entails collecting and collating credit financial data on borrowers including individuals, businesses, companies, sole proprietors, companies and Government entities is the function of credit reference bureau. Lenders in the world, particularly commercial banks, have been citing the absence of a mechanism to know customers’ background as a major factor behind the high lending charges they impose. One of the risks of making a bank loan or investing in a debt security is credit risk, the risk of borrower default. In response to this potential problem, new financial instruments called credit referencing has been developed in the past few years. Thus the aim of the objective was to investigate the impact of credit referencing practices in financial institutions in Kenya. The research problem was best studied through the use of a descriptive survey. Primary data was collected from the managers of the commercial banks since they were able to understand the corporate governance issues concerning their institutions Questionnaire was administered to the managers in all departments of the selected commercial banks. Data analysis used the Statistical Package for Social Sciences (SPSS) software. With the help of (SPSS) the findings were presented in form of frequency distribution tables, bar charts and pie charts. The findings indicated that majority of the respondents agreed that inadequate information systems concerning referencing affected market segmentation and credit referencing. According to the findings, majority indicated that their banks reviewed their credit referencing policy half yearly. The study concluded that that there was inadequate information systems concerning referencing affected market segmentation and credit referencing. On credit referencing process, it was evident that banks reviewed their credit referencing policy half yearly. The study recommended that recommends that financial firms should adopt adequate information sharing systems on credit referencing. Information sharing is deemed to be crucial to improve credit market performance. Secondly the credit department should ensure that credit referencing process is reviewed periodically. This will ensure accuracy, efficiency and effectiveness of the rating associated with lending facility.