The Effectiveness of Credit Reference Bureau (CRB) On the Provision of Credit by Commercial Banks in Kenya

A Research Project Report Submitted to the Chandaria School of Business in Partial Fulfillment of the Requirement for the Degree of Masters in Business Administration (MBA)The purpose of this study was to access the effectiveness of Credit Reference Bureaus on provision of credit among selected commercial banks in Kenya. The specific objective was to carry out an indepth analysis of the functionality of Credit Reference Bureaus, to investigate why Credit Reference bureaus encourage sharing of borrowers information, and to investigate the effect of Credit Reference Bureau on non-performance loans in the lending market. The target population was 300 comprising of branch managers, credit analysts, credit administrators and loan officers working within the banks. The sample size was determined using simple random sampling method and this helps to reduce biases or prejudices in selecting samples A sample of 30% was selected resulting into 90 respondents out of which 79 responded. Primary data was collected by administering close-ended questionnaires, using a five point a likert scale to the respondents, which were self-administered through drop and pick method. Responses to the questionnaires were examined, processed and tabulated into meaningful data. Frequency tables and percentages were used to present the findings in an easily understandable format. A regression relationship was generated to show the extent to which the dependent variable was affected by each of the independent variables. The first objective sought to establish functionality of Credit Reference Bureaus. The study established that to a great extent, credit bureau keeps a credit history record of the borrower, credit bureaus collect, organize and consolidate information from many lenders, who associate with the bureau by providing access to their databases, upon the request of a user, credit reference bureaus provide credit reports that contain particular individuals’ credit history. The second objective sought to establish how Credit Reference Bureaus influenced sharing of borrowers’ information. The findings revealed that to a great extent sharing credit information is critical in facilitating better assessment of risks associated with prospective borrowers, and information asymmetry has caused difficulty in differentiating good and bad credit risks. Also to a great extent, lack of information has contributed towards adverse selection or moral hazard problems in lending activity of the bank, while banks lack data needed to screen credit applications and to monitor borrowers. v The third objective sought to establish how Credit Reference Bureaus influenced non-performance loans. The study found out that all the respondents were aware of non-performing loans in the bank. The study found out that most of the respondents indicated that it took 1-2 months to process the loans before the adoption of CRB. The study also found out that the majority of the respondents indicated that it takes between 2-7 days to process a loan after the adoption of CRB. Majority indicated that the bank was requesting for credit reports for all credit applications, the researcher sought to find out how credit reports help identify, and monitor risks, while CRB decreased default rates as borrowers aim to protect their “reputation collateral” by fulfilling their obligations in a sensible manner, and financial institutions use information from Credit reports for risk identification through risk mapping and/or scenario analysis. The study concludes that Credit reference bureaus compile credit information, public record data, and identity, makes this information available to the bank in the form of a credit report of individuals and organizations. The study also concludes that Credit Reference Bureaus create a mechanism that facilitates credit information sharing at an affordable rate. The study also concludes that the main factors that lead to credit risk include lending to borrowers with questionable characters, serial loan defaulters, high interest rates that make it hard for some to pay management and legal framework. The study recommended that the government should license more bureaus to increase the availability of information among the banks and as well as individuals recommended that there be put strong control systems to monitor the use of CRBs in Kenya. Moreover, banks need to sensitize consumers to the importance and functionality of Credit Reference Bureaus in a bid to make consumers from all financial back grounds be keen on meeting their loan obligations and be eager to share truthfully credit information pertaining to their loan instruments. The study recommends that the government should be even more involved in the lending markets ensuring mandatory compliance to settlement of debts as constitutionally required of the integrity section of the Kenyan law. There is a need to therefore undertake further studies to establish the challenges facing CRB performance