Credit Reference Bureau (CRB) As a Strategic Control Measure and Its Influence on the Financial Performance of Commercial Banks in Eldoret, Kenya

Abstract

Banks are profit making institutions and their performance is critical to their survival. Competition within the banking sector has seen most of these institutions adopt performance management tools that will enable them manage their performance. Many borrowers make a lot of effort to repay their loans, but do not get rewarded for it because this good repayment history is not available to the bank that they approach for new loans. On the other hand, whenever borrowers fail to repay their loans banks are forced to pass on the cost of defaults to other customers through increased interest rates and other fees. Put simply, good borrowers are paying for the bad borrowers and this is making new borrowers more and more hesitant to borrow credit. The ministry of finance, the Central Bank of Kenya and the Kenya Bankers Association have been at the forefront in the introduction of Credit Information Sharing (CIS) to the credit market. The reason for introducing this mechanism was because there was a need to access reliable information on their customers in order to make lending more efficient. Today we have a working CIS that enables all commercial banks to share their credit information through licensed Credit Reference Bureaus (CRBs).The aim of this study was to investigate credit reference bureau and its influence on the performance of banks in Eldoret, Kenya during the period 20052011.The study was guided by the following research questions; What is the number of defaulted loans three years before and after the introduction of the CRB model?, How have debts outstanding at the time of default been classified?, How has the financial performance of the banks been three years before and after the introduction of the CRB model? And what is the relationship between the loans default and the financial performance of the banks. This means that the study was assessing the performance of the loan portfolio within the banking sector and how this could have affected the financial performance of the banks. The study targeted a population of 179 respondents from which 97 respondents was sampled comprising of 31 branch managers, 31 credit managers and 35 credit reference bureau employees. The study consequently employed simple random sampling and census sampling technique to select the respondents and data was collected using secondary sources such as the data collection sheets and primary sources such as the interview schedules. Analysis was done through descriptive statistics where findings were presented in form of charts, graphs and tables. ANOVA was used to test the significance the study’s hypotheses. The study found that there was high number of defaults in the year 2008 and the lowest in the year 2010 with only 15.9% being defaulted. From the study, it was also found out that, most of the secured loans, that is, the loans with collateral were the long-term loans at 96%. More so, wholesalers were found to be the greatest defaulters with a default rate of 41.6% while mining companies and electricity, gas and water supply companies both had the least default rate of 0.9% each. The findings further shows that 1 year after a default occurs on average 48% of the sample’s exposure at default was recovered, 2 years after a default on average 62% of the sample’s facility exposure was recovered. On average the biggest portion of recovery was gathered in the first year after a default and is decreasing each year. It is the recommendation of this study that lenders should appreciate the need for strategic control systems and consequently be able to develop other strategic control measures while enhancing effectiveness of CRB. It is also the recommendation of this study that lenders should identify strategic control measures that match their institution’s objectives and thus will ensure high performance of such firms. Key Terms: Credit Reference Bureau, Financial performance, Strategic Control . Credit Reference Bureau (CRB) As A Strategic Control Measure And Its Influence On The... DOI: 10.9790/0837-20514464 www.iosrjournals.org 45 | Page