The Effect of Credit Referencing on Non Performing Loans Among the Microfinance Institutions in Kenya

Abstract

The primary function of financial institution is mobilizing deposits from surplus units to deficit units in the form of loan and advances to various sectors such as agricultural, industry, personal and governments. Thus, they are considered as an intermediary between the depositors and borrowers. However, in recent times, there have been an increased number of significant lender problems both at matured and emerging economies. Non-Performing loans have caused significant losses to the lenders. Credit Information Sharing mechanism was launched in Kenya to avert rising numbers in non- performing loans by sharing credit information that would reduce risks related to information asymmetry. This study was informed by objective that sought to find out the effect of credit referencing on non-performing loans among MFIs in Kenya. Descriptive research methodology was applied where by secondary data was collected from published financial statements of MFIs in Kenya between years 2006 to 2014 through descriptions and this was useful in identifying variables and hypothetical constructs that were critical in data analysis. The researcher used t-test and regression analysis to analyse the data and establish the relationship between credit referencing and NPLs. The study found that CRBs had an effect on NPLs; there was an average reduction of 2% on the level of NPLs in the years after the introduction of CRBs i.e. 2011-2014 hence positive significant effect of CRBs on NPLs during the period of study. The more the credit information shared between MFIS and CRBs the fewer the number or and amount of non-performing loans. The research finding informs a policy recommendation to have MFIs management establish an efficient, secure and effective mechanism through which credit information can be shared between MFIs and CRBs. This mechanism must guarantee integrity and credibility of the information shared.