Credit Reference Bureau Strategy and Loan Performance at the Commercial Bank of Africa in Kenya

Abstract

Credit reference bureaus enable information sharing about a borrower’s characteristics and their indebtedness. This improves a financial institution's knowledge of applicant characteristics and permits a more accurate prediction of their repayment probabilities as well as abilities. The credit reference bureaus in Kenya play a complementary role to the commercial banks in that CRB’s enable the commercial banks to lend more to better risk clients. A lack of accurate information sharing on the credit history and current financial ability of prospective borrowers makes it extremely difficult for lenders to correctly assess their credit worthiness and likelihood to repay their loans. The objective of the study was to determine the impact of credit reference bureaus as a strategy on the level of loan performance in Commercial Bank of Africa. This was a case study research. The study made use of both primary and secondary data. Primary data was collected by use of face to face interviews between the researcher and respondents. The respondents included the Head of Remedial Services, Manager of Collections, Manager of Recoveries, Manager of Compliance, Head of Credit analysis, Head of corporate banking, Head of Risk and Head of Audit. Secondary data was obtained from organizational documents such annual financial reports and annual performance evaluations. An interview guide was used as an information gathering tool. Content analysis technique was used to analyse the data. The study found that CRBs are used for providing a person’s or entity’s credit history, sharing credit information analysis, storing and dissemination of information from lenders on borrowers loans, generating reports for borrowers upon request, helping in identification of serial credit defaulters and providing credit rating or scoring of a customer. The study concludes that Credit Information sharing affects non-performing loans by lowering banks risk level hence reducing the portfolio at risk and the provisioning for NPLS which in turn increases the profitability of the bank. Additionally choosing the right customer for lending through prudent lending plays a significant part in reducing the level of NPLs as the character of the borrower is checked through the credit information obtained and this ensures that banks only lend to customers whose credit history is favourable. Commercial Banks in Kenya should make more use of the CRB reports so that they control their greatest problem of non-performing loans. The commercial banks need to make a concerted effort to have complete information of the borrower in order to make prudent decisions in relations to the credit requests they receive. The operational costs incurred in performing due diligence tasks should generally transferred to their customers directly or indirectly. The government should license more bureaus and as such lead to greater availability of credit information to banks and as well as individuals. In policy, the study is of great help to stakeholders and the regulatory bodies and policy makers to make informed credit decisions. It will aid in policymaking regarding access to credit and other regulatory requirements of the commercial banks. In practice, the findings, conclusions and recommendations provide an opportunity to banking industry in Kenya on how they can fully utilize implementation of Credit Reference Bureau. In theory, the study contributes to the existing body of knowledge on Credit Reference Bureaus in banks especially in Kenya.