Relationship Between Information Sharing and Levels of Non-performing Loans in Commercial Banks in Kenya

Abstract

ABSTRACT This study set out to establish the relationship between information sharing and levels of non-performing loans in commercial banks in Kenya. In Kenya there exist two licensed Credit Reference Bureaus that facilitate sharing of information. The type of information shared for clients are both negative and positive; however it is not clear on the efficacy of these two bodies in fulfilling their goals. This study thus set out to explore the problem of non-performing loans in commercial banks due to asymmetric sharing of information on clients' specifically, on defaulted loans, total arrears and total loan exposures. Theories predict that information sharing among lenders attenuates adverse selection and moral hazard and can therefore increase lending and reduce default rates. Limits to information-sharing on the financial history of borrowers exist mainly because of credit institutions fear of competition. Poor loan quality has its roots in the informational challenges which afflict financial markets where developing economies are the worst affected. The study used causal relationship design while the population constituted registered and operational commercial banks as at 31st December 2004 licensed to carry out banking business under the Banking act Cap 488 Part II Sec (4) (5). The research study utilized both secondary and primary data. Quantitative data on nonperforming loans for the commercial banks was extracted from annual reports, profit and loss accounts, balance sheets and cash flow statements. A period of one year was considered (2010).These statements were obtained from the commercial banks, published financial statements from local newspapers as well as from Kenya institute of bankers Association offices. These sources were preferred as they were authoritative. Data on information sharing credit was obtained through the use of questionnaires that were directed to commercial banks in Kenya. The questionnaires were administered to staff in credit departments. The questionnaires consisted of both closed and open ended questions and were dropped to be picked later. The questionnaires were coded in the Statistical Package for Social Sciences (SPSS) computer software for analysis of responses and a report on the findings was written. The study concludes that, sharing of clients' information among commercial banks and individuals helps reduce the level of nonperforming loans advanced by commercial banks.