An evaluation of the role of information sharing in mitigating non-performing loans in Kenya’s banking sector
Maina, Naomi Wanjiku
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This research was an evaluation of the role of information sharing in mitigating non-performing loans in Kenya’s banking sector. Guided by five research objectives, the study established quarterly distribution trend of the non-performing loans (NPL) from 2004-2013, identified factors accounting for NPL, examined the relationships between the key factors, evaluated the effect of information sharing on NPL and proposed strategies on improving information sharing towards mitigating NPL for Kenya’s banking sector. A census of 44 banks and 2 credit reference bureaus (CRBs) was undertaken using self-administered questionnaires and interviews, respectively. Descriptive statistics, factor and regression analysis were employed on the primary and secondary data collected. Limitations to the study included denied access by Central Bank of Kenya (CBK) and some commercial banks resulting in a 63% response rate. The study confirmed that information sharing practice is only one among other factors that account for NPL. The behaviour of the NPL trend in 2004-2013 was observed as affected directly or indirectly by bank lending rates, real GDP, annual overall inflation and specific provision. Three factors account for NPL behaviour – regulation, macroeconomic and bank-specific factors. In a multiple regression model bank-specific factors - bank lending rates and specific provision- have significance; macroeconomic factor overall annual inflation showed significance; real GDP showed non significance. As a bank specific factor, information sharing role is critical in mitigating NPL as it corrects the moral hazard problem of information asymmetry. All banks confirmed submitting and receiving ‘full file’ credit information to either of the CRBs. Negative credit information received from CRBs assists banks’ decision to ration credit, demand collateral and reject loan application; while positive information guides banks’ as one of several other assessment criteria required before loan approval. Strategies to improve the mechanism include expansion of borrower data captured by CRBs, CBK to promote innovation in information sharing products, quality and reliability of the data. The peculiar and contradicting behaviour of macroeconomic factors – overall annual inflation and real GDP – in affecting levels of NPL in a multiple regression model is a suggested area of further study.