The effect of credit information sharing on loan performance of commercial banks in Kenya
Bonaya, Dabasso A
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Non-Performing loan rate is one the most important factor to consider when analyzing banks‟ performance. There are lots of factors responsible for this ratio. Some of them belong to firm level issues and some are from macroeconomic measures. The objective of this study was to investigate the effect of credit information sharing on loan performance as one these factors in the blend. Theory predicts that information sharing among lenders attenuates adverse selection and moral hazard, and can therefore increase lending and reduce default rates. The demand for information by financial institutions on one hand and the pressure from the regulator to improve risk management and the government objective of financial deepening on the other has led to emergence of credit reference bureau to collate information from lenders. Credit reference bureaus are information brokers operating on the principle of reciprocity, collecting, filing and distributing the information supplied voluntarily by their members. They allow its members easy access and ready use of such data for credit appraisals purposes. The researcher used econometric analysis system (Eviews, Version 7.0) to analyse time series empirical data to examine the relationship between credit information sharing and loan performance by establishing correlation coefficients between the aggregate number of credit reports requested by forty two commercial banks and their aggregate loan performance as measured by level of non-performing loans. The study employed descriptive as well as correlation research designs and August 2008 to June 2012 constituted the study period. The findings were that loan performance as measured by loan default rate is negatively related to credit information sharing, lending rate and total loans. The negative relationship between default rate and total loans is in tandem with Ndungu (2002), Brown (2007) and Mwangi and Sichei (2009) findings and government objective of launching credit referencing while the negative relationship between default rate and credit information is consistent with Pagano (2000) and Mwangi and Sichei (2009). Therefore, use of credit information sharing in credit appraisal process was found to be value additive.
University of NairobiSchool Of Business, University Of Nairobi