The Effect of Credit Information Sharing on Loan Performance in Commercial Banks in Nairobi County

Information remains a crucial input in the banking industry. Banks are confronted with asymmetric information problems because of borrowers' informational opacity. Banks overcome this problem by accumulating information about their borrowers' creditworthiness, using their superior ability to collect and process information. Obtaining useful unique information about their borrowers can be costly for banks, but it provides a competitive advantage and a source of rents over the lifetime of the relationship. Commercial banks play a pivotal role in the economy in the intermediation process by mobilizing deposits from surplus units to deficit units. The surplus is channeled to deficit units through lending. Lending is the main activity of commercial banks in Kenya. The Kenyan banking sector was in the 80’s and 90’s saddled with a momentous Non-Performing Loans (NPLs) portfolio. This invariably led to the collapse of some banks. One of the catalysts in this scenario was “Serial defaulters”, who borrowed from various banks with no intention of repaying the loans. Undoubtedly these defaulters thrived in the “information asymmetry” environment that prevailed due to lack of a credit information sharing mechanism. Credit Reference Bureaus complement the central role played by banks and other financial institutions in extending financial services within an economy. CRBs help lenders make faster and more accurate credit decisions. They collect, manage and disseminate customer information to lenders within a provided regulatory framework – in Kenya, the Banking (Credit Reference Bureau) Regulations, 2008 was operationalized on 2nd February, 2009. The Regulations govern licensing, operation and supervision of CRBs by the Central Bank of Kenya. The development of a sustainable information sharing industry is therefore recognized as a key component of financial sector reforms in almost all developing and emerging economies. It is on this background that this study was carried out to establish the effects of Credit Information Sharing (CIS) on performance of loans in Commercial Banks in Nairobi County in Kenya. Specifically, the study aimed to investigate the effects of Credit Information Sharing (CIS) on loan uptake, interest rates, default rates and the use of collaterals as security to loans. The study was carried out on 35 commercial banks in Nairobi County. The results indicate that improved screening effects from the CIS system caused the level of loan portfolio arrears to decline after it was implemented in most banks. The Researcher also observed an even more substantial and significant effect of the information system in reducing late payments that occur during the loan cycle.The researcher also found out that when information is shared by an information exchange institution, such as credit bureaus and public credit registers, the higher competition drives down interest rates and reduces benefits derived from otherwise monopolistic information. Credit Information Sharing allows banks to better distinguish between good and bad borrowers and over time, potential borrowers with a "Good Credit Report" or "Good Credit History" are able to access loans more cheaply and easily than high risk defaulters.