INFLUENCE OF CREDIT REFERENCING ON LOAN PERFORMANCE IN THE KENYAN BANKING SECTOR

Robert Gitau Muigai, Gideon Mwangi

Abstract


Despite the decade-long existence of Credit Reference Bureaus in Kenya, lenders continue to grapple with a high prevalence of non-performing loans. However, available studies associate credit referencing with a reduction in bad loans among financial institutions. This is however doubtful considering the consistent rise in non-performing loans within the banking sector over the same period. It is this contrast that has motivated a follow-up study to establish an accurate empirical position. The study sought to investigate how credit referencing influences loan performance among Kenyan lenders. The study was anchored upon the Information asymmetry theory. The study adopted the descriptive survey research design and targeted 39 commercial banks and 14 registered microfinance banks operating in Kenya as of 31st December 2020. The study selected 21 commercial banks using a stratified sampling plan based on the 3 tiers as defined by the Central Bank of Kenya. It also included four microfinance banks. Structured questionnaires were used to collect primary data on the independent variable and a data collection sheet was used to collect secondary data on the dependent variable over a 10-year period. Respondents comprised the branch managers and credit officers. Both descriptive and inferential statistical analysis techniques were employed to obtain the findings of the study. The findings of the study showed that all the credit referencing parameters were negatively but insignificantly related to loan performance among Kenyan lenders. Consequently, the study recommended that the management of the banking institutions should pay close attention to the adverse credit information relating to borrowers. Further, banking institutions should operationalize a differentiated credit pricing model as a mechanism to reward borrowers with good credit history. The Central Bank of Kenya should also strengthen the banking supervision function so as to negate the growing trend in non-performing loans among the lenders by instituting appropriate sanctions.

JEL: O15; J24; L20

 

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Keywords


credit reference bureaus, loan performance, credit information sharing, Central Bank of Kenya, microfinance banks

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References


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DOI: http://dx.doi.org/10.46827/ejefr.v6i3.1328

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