The Effect of Credit Reference Bureaus on the Level of Non- Performing Loans in the Commercial Banks in Kenya

Abstract

Lending is the main activity of commercial banks in Kenya. However, Non-Performing loans have caused significant losses to the banks. As a result of the banking failures experienced in Kenya and to find a way forward to prevent further failures, the Credit Information Sharing mechanism was launched in Kenya and banks were required to share their defaulters’ data to the bureau. This study was guided by objective that sought to find out the effect of credit reference bureaus on the level of nonperforming loans in commercial banks in Kenya. Secondary data was collected from published financial statements of commercial banks in Kenya between years 2007 to 2012. The researcher adopted an event study design and regression analysis method and the study was carried out on the 42 operational commercial banks. The researcher used t-test to analyse the data and the null hypothesis was: there is no positive significant effect of credit reference bureaus on the level of nonperforming loans in commercial banks in Kenya The study found that CRBs had an effect on NPLs; there was an average reduction of 4% on the level of NPLs in the years after the introduction of CRBs i.e. 2010-2012 and the null hypothesis was rejected; there was positive significant effect of CRBs on the level of NPLs. The study also concluded that there is an inverse relationship between the number of credit checks done by the CRBs and the level of NPLs. Therefore, the use of credit reference bureaus by commercial banks in Kenya was found to be value additive and did indeed reduce the level of NPLs in commercial banks in Kenya.