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Assessment of Credit Reference Bureaus on the Management of
Nonperforming Loans in the Banking Industry in Kenya
A Case of Nairobi County

+dam S,isia
1-
.illiam Sang
1( 2
/,arles Mutung0u
1(2($
(
1r .alter Bi2,anga %3i4o
1(2($()

1. S2,ool of Business and E2onomi2s( Mount 5en6a 7ni8ersit6( !.% Bo9$)2 2ode 01000 :,i3a( 5en6a
- E-Mail; 2orresponding aut,or; adams,isia<gmail.2om
2. S2,ool of Business and E2onomi2s( 5a4ara3 7ni8ersit6( !ri8ate Bag = 2015*(Na3uru( 5en6a
E-Mail;san3ipwil<gmail.2om
$. S2,ool of Business and E2onomi2s( Mount 5en6a 7ni8ersit6( !.% Bo9$)2 2ode 01000 :,i3a( 5en6a
E-Mail; 2mutungu<gmail.2om
). S2,ool of Business and E2onomi2s( Mount 5en6a 7ni8ersit6( !.% Bo9$)2 2ode 01000 :,i3a( 5en6a
E-Mail; walter.o3i4o<6a,oo.2om

Abstract
:,e purpose of t,is stud6 was to find out t,e role of />B" in t,e management of nonperforming loans in
5en6a0s 4an3ing industr6. :,is stud6 also soug,t to e8aluate t,e effe2t of information s,aring 46 /redit
>eferen2e Bureaus regulation on nonperforming loans and to esta4lis, t,e e9tent to w,i2, reputation 2ollateral
and 4la23listing ,as on management of 4ad de4t in 5en6a0s Ban3ing industr6. :,e stud6 sour2ed data from
se2ondar6 sour2es. :,e data was o4tained from finan2ial reports( li4rar6( and 4an3s0s re2ords su2, as in-,ouse
maga?ines( @ournals( pu4li2ations as well as we4site and ot,er resour2eful information a8aila4le for 5 6ears from
200# to 201$(t,e duration w,en t,e />B regulation ,as 4een in operation. + regression relations,ip was
generated to s,ow t,e e9tent to w,i2, ea2, independent 8aria4le influen2ed t,e dependent 8aria4le. +
2orrelation anal6sis was also performed to find ,ow t,e 8aria4les are related to ea2, ot,er in t,e model. :,e
resear2, findings s,owed t,at t,e />B pla6s a ma@or role in managing nonperforming loans. >eputation
2ollateral and 4la23listing do ,a8e 4ot, positi8e and negati8e effe2t respe2ti8el6 on t,e management of 4ad de4t
in 5en6a0s Ban3ing industr6. In addition( />B firms in 5en6a s,ould lin3 wit, ot,er regional />B firms in
ot,er 2ountries as to ,a8e information on 2redit ,istories of t,ose 2rossing t,e 4orders. :,e stud6 also re8ealed
t,at la23 of awareness and non-2omplian2e are 2urrentl6 t,e ma@or 2,allenges of />B appli2ation in 5en6a. :,e
stud6 re2ommends t,at t,e />B 4e e9tended to all non-4an3ing se2tors t,at ,andle 2redit transa2tions sin2e t,is
will re8eal more 2redit ,istories of different 4orrowers.
Keywords: /redit >eferen2e Bureaus( /redit Aistories. Nonperforming Boans.

! Introduction
:,e pro4lem of nonperforming loans due to loan defaulters is one of t,e ma@or 2auses of finan2ial losses
e9perien2ed 46 finan2ial institutions in 5en6a. +22ording to Basel 11 re2ommendations Ban3 /ommittee of
Ban3ing Super8ision( 2005"( finan2ial institutions world o8er need to impress t,e 4est 2redit ris3 management
pra2ti2es in order to a8oid non-performing loans w,i2, affe2t t,eir finan2ial performan2e. :,ese non-performing
loans are 2aused 46 4ad 4orrowers w,o are not 2redit-wort,6. Cinan2ial institutions t,erefore must find
me2,anisms t,at 2an 2olle2t and store information 2on2erning 4orrowers w,o are not onl6 2redit-wort,6 4ut also
w,o ,a8e good 2redit ,istories. :,is is a2,ie8ed t,roug, organisations 2alled /redit >eferen2e Bureaus />B".
+22ording to >e,m (2002( 4an3s and ot,er finan2ial institutions s,ould impro8e t,eir 2apa4ilities of
management non performing loans and a8oid management of nonperforming loans during t,e lending pro2ess
46 use of information s,aring me2,anisms pro8ided 46 /redit >eferen2e Bureaus.
:,e 2on2ept of 2redit reporting agen2ies was 4orn in t,e 1#'0s in t,e 7S( w,en mer2,ants needed to
3eep tra23 of t,eir 2ustomers( espe2iall6 t,ose of poor 2redit ris3. Names were usuall6 2ompiled in listsD t,ese
were t,e first E2redit 4ureaus.E .it, t,e ad8an2e of te2,nolog6 and furt,er growt, of 2ommer2e( 2ompanies t,at
dealt wit, 2olle2ting 2redit data 4egan to ta3e s,ape. Sulli8an et al( 200$". In +fri2a( t,e 2on2ept of /redit
>eferen2e Bureaus ,as ,ad its pra2ti2e in few sele2ted 2ountries 46 multilateral 2ompanies t,roug, pri8ate 2redit
4ureaus su2, as /ompus2an w,i2, operates in Botswana( Nami4ia and >wanda w,ile 5ut? 7ni8ar( operate in
:an?ania( 5en6a and 7ganda. In 5en6a( 4efore t,e pu4li2ation of t,e Ban3ing /redit >eferen2e Bureau"
regulations 200# and t,e li2ensing of t,e first 5en6aFs 2redit 4ureau( />B +fri2a Btd in Ce4ruar6 2010( 5ut?
7ni8ar 4ureau was operating in t,e 2ountr6.
In 5en6a( /redit >eferen2e Bureaus >egulations outline t,e responsi4ilities of finan2ial institutions
and />Bs as well as pro8iding for t,e o8ersig,t of />Bs 46 /entral Ban3 of 5en6a /B5". :,e >egulations
2ompel t,e s,aring of information on 4ot, non-performing loans as well as on performing loans. /urrentl6( /B5
,as sin2e li2ensed two />Bs- /redit >eferen2e Bureau +fri2a Bimited( and Metropol /redit >eferen2e Bureau
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Bimited. :,ere are )) li2ensed 2ommer2ial 4an3s under t,e 4an3ing +2t in 5en6a 2urrentl6.
+22ording to /B5 t,e introdu2tion of />Bs in our finan2ial lands2ape is an effort to en2ourage
s,aring of information 46 institutions so as to redu2e t,e in2iden2es of serial defaults 46 4an3 2ustomers as well
as minimi?e t,e in2iden2es of non-performing loans. /redit information s,aring will allow 4an3s to distinguis,
4etween good and 4ad 4orrowers. Borrowers on t,e ot,er ,and will 4enefit from t,eir 2redit ,istories and t,ose
4la23listed will send a moral 2,e23 to ma64e moral ,a?ard 2ounterparts. Information s,aring will also present
2ustomers wit, t,e opportunit6 to negotiate a for good 2redit terms w,en one ,as a good 2redit re2ord. :,is
stud6 t,erefore soug,t to assess t,e role />B in t,e Management of Nonperforming Boans in t,e Ban3ing
Industr6 in 5en6a.

"!#! Literature re$iew
"!! %heoretica& re$iew
"!!"! %he theory of asymmetric information
:,e t,eor6 of as6mmetri2 information was introdu2ed 46 +3erlof( G. 19*0" in ,is 2o8eted paper in 19*0
entitled HBemonsI; Jualit6 7n2ertaint6 and t,e mar3et Me2,anism. In t,e paper( +3erlof de8elops as6mmetri2
information wit, e9ample 2ase of automo4ile mar3et. Ais 4asi2 argument is t,at in man6 mar3ets( t,e 4u6er uses
some mar3et statisti2s to measure t,e 8alue of 2lass of goods. :,us t,e 4u6er sees t,e a8erage of t,e w,ole
mar3et w,ile t,e seller ,as more intimate 3nowledge of spe2ifi2 item. +3erlof argues t,at t,is information
as6mmetr6 gi8es t,e seller an in2enti8e to sell goods of less t,an a8erage mar3et Kualit6( leading to ad8erse
sele2tion. :,is rat,er self-e8ident premise ,as ne8ert,ess re8olutionalised modern e2onomi2 t,oug,t sin2e t,e
19*0s. :,is ga8e rise to se8eral seminal 2ontri4utions and in2luded t,e wor3s of Spen2er 19*$"( >ot,s2,ild
Stiglit? 19*'" and +3erlof( G. 19*0" ,imself.
"!!"! Credit theory of money
/redit t,eories of mone6 also 2alled de4t t,eories of mone6" are 2on2erned wit, t,e relations,ip 4etween 2redit
and mone6. !roponents of t,ese t,eories( su2, as +lfred Mit2,ell-Innes( sometimes emp,asi?e t,at 2redit and
de4t are t,e same t,ing( seen from different points of 8iew >and6 .ra6 200)". !roponents assert t,at t,e
essential nature of mone6 is 2redit de4t"( at least in eras w,ere mone6 is not 4a23ed 46 a 2ommodit6 su2, as
gold. :wo 2ommon strands of t,oug,t wit,in t,ese t,eories are t,e idea t,at mone6 originated as a unit of
a22ount for de4t( and t,e position t,at mone6 2reation in8ol8es t,e simultaneous 2reation of mone6 and de4t.
Some proponents of 2redit t,eories of mone6 argue t,at mone6 is 4est understood as de4t e8en in s6stems often
understood as using 2ommodit6 mone6. %t,ers ,old t,at mone6 eKuates to 2redit onl6 in a s6stem 4ased on fiat
mone6( w,ere t,e6 argue t,at all forms of mone6 in2luding 2as, 2an 4e 2onsidered as forms of 2redit mone6.
:,e first formal /redit t,eor6 of mone6 arose in t,e 19t, 2entur6. +nt,ropologist 1a8id Grae4er ,as argued t,at
for most of ,uman ,istor6( mone6 ,as 4een widel6 understood to represent de4t( t,oug, ,e 2on2edes t,at e8en
prior to t,e modern era( t,ere ,a8e 4een se8eral periods w,ere ri8al t,eories li3e Metallism ,a8e ,eld swa6
>i2,ard .erner 2005".
+22ording to Josep, S2,umpeter( t,e first 3nown ad8o2ate of a 2redit t,eor6 of mone6 was !lato.
S2,umpeter des2ri4es Metallism as t,e ot,er of Etwo fundamental t,eories of mone6E( sa6ing t,e first 3nown
ad8o2ate of metallism was +ristotle( a22ording to >i2,ard .erner 2005". :,e earliest modern t,in3er to
formulate a 2redit t,eor6 of mone6 was Aenr6 1unning Ma2leod( wit, ,is wor3 in t,e 19t, 2entur6( most
espe2iall6 wit, ,is :,e :,eor6 of /reditL 1##9". Ma2leodLs wor3 was e9panded on 46 +lfred Mit2,ell-Innes in
,is papers .,at is Mone6M 191$" and :,e /redit :,eor6 of Mone6 191)"( >and6 .ra6 200)"( w,ere ,e
argued against t,e t,en 2on8entional 8iew of mone6 arising as a means to impro8e t,e pra2ti2e of 4arter. In t,is
alternati8e 8iew( 2ommer2e and ta9ation 2reated o4ligations 4etween parties w,i2, were forms of 2redit and de4t.
1e8i2es su2, as tall6 sti23s were used to re2ord t,ese o4ligations and t,ese t,en 4e2ame negotia4le instruments
w,i2, 2ould fun2tion as mone6.
"!!'! (uantity %heory
Juantit6 :,eor6 of /redit was proposed in 1992 46 >i2,ard .erner( >i2,ard .erner 2005"( w,ere46 2redit
2reation is disaggregated into 2redit for G1! and non-G1! finan2ial 2ir2ulation". :,e approa2, is tested
empiri2all6 in a general-to-spe2ifi2 e2onometri2 time series model and found to 4e superior to alternati8e and
traditional t,eories. .erner found t,at 4an3 2redit 2reation for G1! transa2tions 2auses nominal G1! growt,(
w,ile 2redit 2reation for finan2ial transa2tions e9plains asset pri2es and 4an3ing 2rises. >i2,ard .erner 2005".
In ,is 4oo3( New !aradigm in Ma2roe2onomi2s( >i2,ard .erner presents a 2ompre,ensi8e and empiri2all6
tested 2redit t,eor6 of mone6( in2luding t,e Juantit6 :,eor6 of /redit( and poli26 proposals as to ,ow to a8oid
t,e Lre2urring 4an3ing 2risesL and ,ow to stimulate e2onomies after se8ere 4an3ing 2rises ma3ing use of
.ernerLs poli26 2on2ept of Kuantitati8e easing( w,i2, ,e proposed in Japan in 199)( and w,i2, is defined in true
L2redit t,eor6 of mone6L spirit as an e9pansion in 2redit 2reation for G1! transa2tions. .ernerLs ,istori2al
anal6sis presents a ,istori2al o8er8iew of 2redit mone6( tra2ing it 4a23 to an2ient Mesopotamia.
+22ording to 1a8id Grae4er 2011"( t,e 4est a8aila4le e8iden2e suggests t,at t,e original monetar6 s6stems
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were de4t 4ased( and t,at most su4seKuent s6stems ,a8e 4een too. E92eptions w,ere t,e relations,ip 4etween
mone6 and de4t was less 2lear o22urred during periods w,ere mone6 ,as 4een 4a23ed 46 4ullion( as ,appens
wit, a gold standard. Grae4er e2,oes earlier t,eorists su2, as Innes 46 sa6ing t,at during t,ese eras population
per2eption was t,at mone6 deri8ed its 8alue from t,e pre2ious metals of w,i2, t,e 2oins were made( 4ut t,at
e8en in t,ese periods mone6 is more a22uratel6 understood as de4t. Grae4er states t,at t,e t,ree main fun2tions
of mone6 are to a2t as; a medium of e92,angeD a unit of a22ountD and a store of 8alue. Grae4er writes t,at sin2e
+dam Smit,Ls time( e2onomists ,a8e tended to emp,asise mone6 as a medium of e92,ange.
!,ilip /oggan 2011" ,olds t,at t,e worldLs 2urrent monetar6 s6stem 4e2ame de4t 4ased after
!resident Ni9on suspended t,e lin3 4etween mone6 and gold in 19*1. Ae writes t,at EModern mone6 is de4t and
de4t is mone6E. Sin2e t,e 19*1 Ni9on S,o23( de4t 2reation and t,e 2reation of mone6 in2reasingl6 too3 pla2e at
on2e. :,is simultaneous 2reation of mone6 and de4t o22urs as a feature of Cra2tional reser8e 4an3ing. +fter a
2ommer2ial 4an3 appro8es a loan( it is a4le to 2reate t,e 2orresponding amount of mone6( w,i2, is t,en a2Kuired
46 t,e 4orrower along wit, a similar amount of de4t( !,ilip /oggan 2011".
In a 2012 paper( e2onomi2 t,eorist !err6 Me,rling notes t,at w,at is 2ommonl6 regarded as mone6
2an often 4e 8iewed as de4t. Ae posits a ,ierar2,6 of assets wit, gold at t,e top( t,en 2urren26( t,en deposits
and t,en se2urities.
1e4t t,eories of mone6 fall into a 4roader 2ategor6 of wor3 w,i2, postulates t,at monetar6 2reation is
endogenous. !,ilip /oggan 2011".
Aistori2all6( de4t t,eories of mone6 ,a8e o8erlapped wit, /,artalism and were opposed to Metallism
Step,anie +. Bell and Edward J. Nell( 200$". :,is largel6 remains t,e 2ase toda6( espe2iall6 in t,e forms
2ommonl6 ,eld 46 t,ose to t,e left of t,e politi2al spe2trum. /on8ersel6( in t,e forms ,eld 46 late 20t, 2entur6
and 21st 2entur6 ad8o2ates wit, a Bi4ertarian or /onser8ati8e perspe2ti8e( de4t t,eories of mone6 are often
2ompati4le wit, Juantit6 t,eor6 of mone6( and wit, Metallism at least w,en t,e latter is 4roadl6 understood.
Step,anie +. Bell and Edward J. Nell( 200$".
"!"! )mpirica& &iterature
2.2.1 The Information Sharing
:,e 5en6an Ban3ing /redit >eferen2e Bureau" >egulations( 200# states t,at t,e main t,e role of /redit
>eferen2e Bureau is to pro8ide 2redit ,istories to finan2ial institutions as to 4e a4le to ma3e lending de2isions in
order to pre8ent 2redit ris3s and ,en2e manage nonperforming loans. +s a result( Jappelli and !agano( 1999" sa6
t,at 2redit 4ureaus assist in ma3ing 2redit a22essi4le to more people( and ena4le lenders and 4usinesses redu2e
finan2ial ris3s. :,e6 add t,at 2redit 4ureaus allow 4orrowers to ta3e t,eir 2redit ,istories from one finan2ial
institution to anot,er( t,ere46 ma3ing lending mar3ets more 2ompetiti8e and in t,e end( mitigate 2redit ris3s and
ma3e 2redit more afforda4le. Jappelli and !agano( 1999" furt,er( asserts t,at s,aring of information 4etween
finan2ial institutions in respe2t of 2ustomer 4orrowing 4e,a8ior( ,as a positi8e e2onomi2 impa2t.
Giese23e 200)" defines 2redit ris3 as t,e distri4ution of finan2ial losses due to une9pe2ted 2,anges in t,e 2redit
Kualit6 of 2ounterpart6 in a finan2ial agreement. Saunders at al 200'" states t,at 2redit ris3 is t,e ris3 t,at t,e
promised 2as, flows from loans and se2urities ,eld 46 finan2ial institution ma6 not 4e paid in full. :,is means
t,at 4orrowers ma6 default in interest and prin2ipal pa6ment( ,en2e 2ausing finan2ial loss to t,e finan2ial
institutions.
+22ording to !etersen( 199)"( t,e data needed to s2reen 2redit appli2ations and to monitor 4orrowers
are not freel6 a8aila4le to 4an3s. .,en a 4an3 does not ,a8e su2, information( it fa2es Had8erse sele2tionI or
Hmoral ,a?ardI pro4lems in its lending a2ti8it6.
+d8erse sele2tion arises w,en some information a4out t,e 4orrowers0 2,ara2teristi2s remain ,idden to
t,e lender ,idden information"( and 2an lead to an ineffi2ient allo2ation of 2redit( Moral ,a?ard arises instead
from t,e lender0s ina4ilit6 to o4ser8e 4orrower0s a2tions t,at affe2t t,e pro4a4ilit6 of repa6ment. :,is 2reates t,e
danger of opportunisti2 4e,a8ior or moral ,a?ard 46 t,e 4orrower and informational disad8antage 46 t,e 4an3
leading to ineffi2ient allo2ation of 2redit.
Aogen et al 2001" suggest t,at redu2tion of management of nonperforming loans is t,e 2ore 4usiness
in t,e 4an3ing 4usiness. +22ording to 1e4ora, >alton and +pril .rig,t International Journal of Ban3 Mar3eting
200$" t,ere is need to ,a8e appropriate management of nonperforming loans management strateg6 in order to
redu2e ris3 of loan default 4e2ause a finan2ial institutions0 8ia4ilit6 is wea3ened 46 t,e loss of prin2ipal and
interest. Eagles and Boswort, 199#" adds t,at if redu2tion of management of nonperforming loans are not
addressed( t,e institution will in2ur finan2ial losses( in2ur 2osts ta3en to re2o8er t,e 2apital at ris3 and fail in its
so2ial role of pro8iding loans to mem4ers of so2iet6 to impro8e t,eir li8ing standards.
7nderstanding t,e effe2ts of information s,aring also ,elps to s,ed lig,t on some 3e6 issues in t,e
design of a 2redit information s6stem( su2, as t,e relations,ip 4etween pu4li2 and pri8ate me2,anisms( t,e
dosage 4etween 4la23 and w,ite information s,aring( and t,e Hmemor6I of t,e s6stem. Jorge( 1999".
+22ording to Smit,( 199#" t,e appli2ation of t,e /B 2on2ept is enfor2ed t,roug, !ri8ate Bureaus and
!u4li2 2redit registers w,ere lenders remit information a4out 4orrower. Smit, adds t,at timeline and trut,fulness
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of t,e data reported 46 lenders to 2redit 4ureaus is enfor2ed in8aria4l6 46 t,reatening de8iants t,at t,e6 will 4e
e92luded from a22ess to t,e 2ommon data 4ase. +22ording to Smit,( 199#" pri8ate 4ureaus are profit oriented
8enture 2reated 46 t,e initiati8e of entrepreneurs or a 2oalition of lenders. Ae states t,at 2redit referen2e agen2ies
su2, as su2, as 1uns N Bradstreet in t,e 7S( 2an 4e regarded as 8oluntar6 information s,aring me2,anisms(
insofar as t,e6 draw a large portion of t,eir data from lenders and suppliers( w,o in return o4tain preferential
a22ess to t,eir data. +l8arado( 1999" defined !u4li2 2redit registers as data4ases 2reated 46 pu4li2 aut,orit6 and
managed 46 2entral 4an3s. :,eir data are 2ompulsoril6 reported 46 lenders( w,o t,en o4tain a return flow of data
for use in t,eir lending de2isions. +l8arado indi2ates t,at spe2ial pu4li2 registers e9ist for spe2ifi2 2lasses of de4t
2ontra2ts or se2urities; for instan2e( in man6 2ountries lease registers re2ord t,e real 2ollateral assisting ,ousing
mortgage loans. :6pi2all6( t,ese registers for spe2ial 2lasses of de4t ,a8e long initiated t,e 2reation of modern
pu4li2 2redit registers managed 46 2entral 4an3s( w,i2, re2ord 4an3 loans and lines of 2redit +l8arado( 1999".
Smit, 199#" indi2ates t,at !/> differs from pri8ate 4ureau in t,at !/> uni8ersall6 2o8ers all finan2ial
institutions and mem4ers,ip is 2ompulsor6 for all lenders under regulator6 @urisdi2tion of t,e /B5S. Aowe8er(
,e sa6s !/> does not 2o8er all loansD t,ere is a t,res,old 4elow w,i2, t,e6 don0t 2o8er. !ri8ate 4ureau 2o8er all
amounts of loans 4ut ma6 onl6 4e patronaged 46 lenders w,o @oin and pa6 mem4ers,ip fee.
2.2.3 The Reputation Collateral
/redit >eferen2e Bureauspla6 2ru2ial role in t,e 2olle2tion and dissemination of 2redit ,istories of 4orrowers.
+22ording to t,e Ban3ing +2t 2ap )##"( t,e 4an3ing 2redit referen2e 4ureau" regulation 200#(/redit >eferen2e
Bureausare said to redu2e default rates as 4orrowers see3 to prote2t t,eir Hreputation 2ollateralI 46 meeting t,eir
o4ligations in a timel6 manner. .it, t,e presen2e of a />B( t,ere is strong moti8ation for 2lients to repa6 t,eir
loans. /redit reports t,at in2lude 4ot, positi8e and negati8e information ,elp 4uild Hreputation 2ollateralI in
mu2, t,e same wa6 as a pledge of p,6si2al 2ollateral. In t,e long run( a 4igger 2redit mar3et and lower default
rates lead to lower interest rates( impro8ed profita4ilit6 and in2reased 2ompetiti8eness.
+22ording to Jappali and !agano(2000"( information s,aring a4out 4orrowers0 2,ara2teristi2s and
t,eir inde4tedness 2an ,a8e important effe2ts on 2redit mar3ets a2ti8it6. :,e6 suggest t,at information s,aring
impro8es t,e 4an3s0 3nowledge of appli2ants0 2,ara2teristi2s and permits a more a22urate predi2tion of t,eir
repa6ment pro4a4ilities. Se2ondl6( Jorge( 1999"( adds t,at it redu2es t,e informational rents t,at 4an3s 2ould
ot,erwise e9tra2t from t,eir 2ustomers. :,irdl6( !etersen(1999"( sa6s it 2an operate as a 4orrower dis2ipline
de8i2e. Cinall6( %ngena and Smit,( 199#"( argue t,at it eliminates 4orrowers0 in2enti8e to 4e2ome o8er-
inde4ted 46 drawing 2redit simultaneousl6 from man6 4an3s wit,out an6 of t,em reali?ing.
2.2.4 Black Listing of Borrowers.
+22ording to /arolina( 1999"( t,e t6pe of information s,ared in 4ot, t6pes of 4ureau is mainl6 H4la23I
information i.e. negati8e information i.e. defaults or arrears and not w,ite information i.e. positi8e information.
In addition( t,e use of />B e9tends to s,aring information merged from ot,er sour2es su2, as 2riminal re2ords(
ta9 re2ords et2. /arolina adds t,at in some 2ase( all t,ese data of information is 2ompiled toget,er and used to
assign 2redit s2ores of 4orrowers 4ased on statisti2al ris3 anal6sis.
:ri8elli( 1999" 2on2luded t,at one of t,e 2,allenges to effe2ti8e use of 2redit referen2e 4ureau is t,e
negati8e effe2ts on 4an3s0 profits as a result of 4la23 listing. Ae argues t,at gi8ing out pri8ate information ,ands
o8er potentiall6 8alua4le asset to t,e 2ompetitors. :ri8elli( 1999"( also agrees and adds t,at ot,er issues su2, as
in2rease in lending to safe 4orrowers ma6 fail to 2ompensate for redu2tion in lending to ris36 4la23 listed t6pes
of 4orrowers !adilla and !agano 199*". !adilla and !agano( 199*"( found out t,at /redit referen2e 4ureau 2an
,a8e a negati8e effe2t of s,aring information a4out 4orrowers0 Kualit6 t6pe. Besides( t,e pro4lem of t,res,old
amount limit as in pu4li2 2redit register and t,e t,reat of infinite memor6 46 t,e 2redit referen2e s6stems ,as
posed some 2,allenges Bolton 1990" (!enati 199#". In t,eir resear2, on /ommer2ial Ban3ing /rises in 5en6a;
/auses and >emedies( Nelson M. .aweru and &i2tor M. 5alani 2009" 2on2luded t,at man6 of t,e finan2ial
institutions t,at 2ollapsed in 90s were due to not 4la23listing serial defaulters. :,is is true for resear2, wor3s 46
Ndegwa( S. 2001" on S6stemati2 and Business ris3s( Mwirigi( !( 5 200'" on +ssessment of /redit >is3
Management :e2,niKues adopted 46 Mi2rofinan2e in 5en6a.
2.2.2. The Challenges Facing Credit Reference Bureaus
:ri8elli( 1999" 2on2luded t,at one of t,e 2,allenges to effe2ti8e use of 2redit referen2e 4ureau is t,e negati8e
effe2ts on 4an3s profits. Ae argues t,at gi8ing out pri8ate information ,ands o8er potentiall6 8alua4le asset to
t,e 2ompetitors. Ae also sa6s t,e lia4ilities of trans-4order 4orrowing w,i2, a22ount for de4t owed to foreign
lenders ma6 not 4e 2aptured 46 t,e lo2al 2redit referen2e s6stems 4ureau ,en2e posing anot,er 4arrier for 2redit
4ureau appli2ation. !agano and Jappelli 199$" suggests t,at t,is pro4lem 2an 4e mitigated if 4an3s s,are
information a2ross 4oarders :ri8elli( 1999"( also agrees and adds t,at t,e design of 2redit information s6stem
2an mitigate ad8erse effe2t of ,anding o8er pri8ate information to 2ompetitors. %t,er issues su2, as in2rease in
lending to safe 4orrowers ma6 fail to 2ompensate for redu2tion in lending to ris36 t6pes of 4orrowers !adilla and
!agano 199*". !adilla and !agano( 199*"( found out t,at /redit referen2e 4ureau 2an ,a8e a negati8e effe2t of
s,aring information a4out 4orrowers0 Kualit6 t6pe. Besides( t,e pro4lem of t,res,old amount limit as in pu4li2
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'1
2redit register and t,e t,reat of infinite memor6 46 t,e 2redit referen2e s6stems ,as posed some 2,allenges
Bolton 1990" (!enati 199#". +22ording to Jappeli and !agano 1999"( t,e possi4ilit6 of 2ollusion of 2redit
4ureau mem4ers 2reate 4arriers to new entrants. Jappali and !agano( 2000" and Aleifer( 199#" o4ser8e t,at
stri2t pri8a26 prote2tion laws in some 2ountries li3e Cran2e( pre8ent de8elopment of pri8ate 2redit 4ureaus. :,e
use of sop,isti2ated te2,nologi2al s6stems( a22ording to Bi?er( 1992"( also pause potential 2,allenge.

*!#! Research Methodo&ogy
:,e resear2, design adopted in t,is stud6 was a 2ase stud6 approa2, using des2ripti8e design t,at in8estigated
t,e role of 2redit referen2e 4ureau in t,e management of nonperforming loans. :,is t6pe of des2ripti8e resear2,
was used 4e2ause it gi8es a s6stemati2 2olle2tion and anal6sis of data in order to answer Kuestions 2on2erning
2urrent status of a program( proposal or a2ti8it6 as it is Mugenda et al 1999".
3.1 Population and saple
:,e population of t,e stud6 2onsisted of all t,e li2ensed 2ommer2ial 4an3s in 5en6a and t,e 2redit referen2e
4ureau under t,e Ban3ing +2t. +22ording to t,e /B5( t,ere were )$ li2ensed 4an3s and two 2redit referen2e
4ureau in 5en6a.
3.2 !apling and sapling techni"ues
+ sample of 9 4an3s was sele2ted using stratified random sampling pro2edures 4ased on t,eir si?e 2ategor6 in
terms of 2apitali?ation as per t,e /B5 ran3ings and t,e two li2ensed 2redit referen2e 4ureaus.
3.3 Research #nstruents
:,e stud6 sour2ed data from se2ondar6 sour2es. :,e data was o4tained from finan2ial reports( li4rar6( and
4an3s0s re2ords su2, as in-,ouse maga?ines( @ournals( pu4li2ations as well as we4site and ot,er resour2eful
information a8aila4le for 5 6ears from 200# to 201$( t,e duration w,en t,e />B regulation ,as 4een in operation
*!'! +a&idity and Re&iabi&ity of instruments
In assessing relia4ilit6 of t,e data( internal 2onsisten26 met,od using /ron4a2,0s alp,a was used w,ose alp,a
8alues o4tained indi2ated a 2oeffi2ient of appro9imatel6 0.* and w,i2, was 2onsidered a22epta4le.
3.$. %ata anal&sis
:,e data from t,e respondents was edited( 2oded and tallied a22ording to t,eir t,emes and anal6?ed into total
s2ores( freKuen2ies( and per2entages using S!SS 2omputer programs and results presented in ta4les( pie 2,arts(
4ar grap,s and figures!
*!,! Regression mode&
:,e stud6 e9amined t,e role of /redit >eferen2e Bureaus on t,e management of nonperforming loans in
5en6a0s 4an3ing industr6 . :,e relations,ip 4etween t,e 8aria4les was stated using a mat,emati2al fun2tion.
O PfQ
1
( Q
2(
Q
$(
"
.,ere O management of nonperforming loans" was t,e dependent 8aria4le and Q
1
( Q
2
( and Q
$
are t,e
independent 8aria4les information s,aring( reputation 2ollateral and 4la23listing of 4ad 4orrowers".
:,erefore( an anal6ti2al model of a linear multiple regression eKuation of t,e form s,own 4elow was de8eloped.
.,ere;
OPR ST
1
Q
1
ST
2
Q
2
ST
$
Q
$
Se
1
OP Management of nonperforming loans
R P +utonomous fa2tors
Q
1
P Information s,aring
Q
2
P >eputation 2ollateral
Q
$
P Bla23listing of 4ad 4orrowers
T
1
P /oeffi2ient for Information s,aring
T
2
P /oeffi2ient for >eputation 2ollateral

T
$
P /oeffi2ient for Bla23listing of 4ad 4orrowers
eP Error term - /aptures all rele8ant 8aria4les not in2luded in t,e model 4e2ause t,e6 were not
o4ser8ed in t,e data set
:,is regression relations,ip s,owed t,e e9tent to w,i2, ea2, of t,e dependent 8aria4le is influen2ed 46
independent 8aria4le. :,is was s,own 46 t,e 2oeffi2ient of t,e independent 8aria4le in ea2, 2ase. + 2orrelation
anal6sis was also performed to find ,ow t,e 8aria4les are related to ea2, ot,er in t,e model.

'!#! -indings
Table 4.1: Model Summary
Model R R Square Adjusted R Square Std. rror of the stimate
1 .'(1
a
.)11 .*') .))1'$

+d@usted > sKuared is 2oeffi2ient of determination w,i2, tells us t,e 8ariation in t,e dependent 8aria4le due to
2,anges in t,e independent 8aria4le. Crom t,e findings in t,e a4o8e ta4le t,e 8alue of ad@usted > sKuared was
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&ol.'( No.2$( 201)

'2
0.*9# an indi2ation t,at t,ere was 8ariation of *9.#U on t,e management nonperforming loans due to
information s,aring( reputation 2ollateral and 4la23listing of 4ad 4orrowers at 95U 2onfiden2e le8el. > is t,e
2orrelation 2oeffi2ient w,i2, s,ows t,e relations,ip 4etween t,e stud6 8aria4les( from t,e findings s,own in t,e
ta4le a4o8e t,ere was a strong positi8e relations,ip 4etween t,e stud6 8aria4les as s,own 46 0.901!

Table 4.2: A!"#A
Model Sum of Squares df Mean Square $ Sig.
1 Regression 0.0)2 2 %.%21 &.%'4 .%1(
b

Residual *.#2) 24 %.&2'
Total *.#'' 2'

Crom t,e +N%&+ statisti2s in ta4le a4o8e( t,e pro2essed data( w,i2, is t,e population parameters( ,ad a
signifi2an2e le8el of 1.#U w,i2, s,ows t,at t,e data is ideal for ma3ing a 2on2lusion on t,e population0s
parameter as t,e 8alue of signifi2an2e p-8alue " is less t,an 5U.

Table 4.&: )oeffi*ients
Model +nstandardi,ed
)oeffi*ients
Standardi,ed
)oeffi*ients
t Sig.
- Std. rror -eta
.)onstant/ .01% .44% 1.159 .%%%
Information sharing 1.22' .122 1.%2' -1.*51 .%1(
Re3utation *ollateral 1.244 .120 12'2 -1.9*' .%4&
-la*5listing of borro6ers 1.24' .1(0 1.1(& -1.)91 .%42
The established regression equation 6as 7 8 %.01% 1 %.22' 9
1
1%.244 9
2
1 %.24'9
&


Crom t,e a4o8e regression eKuation it was re8ealed t,at information s,aring( reputation 2ollateral and
4la23listing of 4ad 4orrowers to a 2onstant ?ero( nonperforming loans in t,e 4an3s would stand at 0.510. + unit
in2rease in information s,aring would lead to a de2rease in nonperforming loans 46 a fa2tor of 0.22'( unit
in2rease in reputational 2ollateral of 4orrowers would lead to de2rease in nonperforming loans 46 fa2tors of
0.2)* and unit in2rease in 4la23listing of 4orrowers would lead to de2rease in nonperforming loans in 4an3ing
industr6 46 a fa2tor of 0.2*'. :,is s,ows t,at t,ere was negati8e asso2iation 4etween management of
nonperforming loans and information s,aring( reputational 2ollateral and 4la23listing of 4orrowers.
:,e stud6 found t,at all t,e sign 8alue for all t,e 8aria4les( information s,aring( reputational 2ollateral and
4la23listing of 4orrowers were found to signifi2antl6 influen2ed 46 information s,aring t,roug, /redit
>eferen2e Bureaus. +ll t,e p-8alue for all t,e independent 8aria4le was found to 4e less t,an 0.05 indi2ating t,at
t,e6 were statisti2all6 signifi2ant.

'!.! Conc&usions
:,e stud6 re8ealed t,at t,e use of />B and its usage in t,e 4an3s pla6s a signifi2ant role towards management
of nonperforming loans. :,ese findings 2onKuered wit, !etersen 1999" and Nelson et al 2009" w,o stated t,at
/>B operates as a 4orrower dis2ipline de8i2e and 2ontri4utes positi8el6 towards management of nonperforming
loans in 4an3ing industr6. :,e resear2, findings s,owed t,at reputation 2ollateral and 4la23listing do ,a8e 4ot,
positi8e and negati8e effe2t respe2ti8el6 on t,e management of 4ad de4t in 5en6a0s 4an3ing industr6. :,is is in
line wit, t,e 2on2lusions of :ri8elli( 1999" w,o 2on2luded t,at one of t,e 2,allenges to effe2ti8e use of 2redit
referen2e 4ureau is t,e negati8e effe2ts on 4an3s0 profits. Ae argues t,at gi8ing out pri8ate information ,ands
o8er potentiall6 8alua4le asset to t,e 2ompetitors. Ae also sa6s t,e lia4ilities of trans-4order 4orrowing w,i2,
a22ount for de4t owed to foreign lenders ma6 not 4e 2aptured 46 t,e lo2al 2redit referen2e s6stems 4ureau ,en2e
posing anot,er 4arrier for 2redit 4ureau appli2ation. :,e stud6 also re8ealed t,at la23 of awareness and non-
2omplian2e are 2urrentl6 t,e ma@or 2,allenges of />B appli2ation in 5en6a. :,e stud6 re2ommends t,at t,e
/>B 4e e9tended to all non-4an3ing se2tors t,at ,andle 2redit transa2tions sin2e t,is will re8eal more 2redit
,istories of different 4orrowers. In addition t,e stud6 re2ommends t,at />B firms in 5en6a s,ould lin3 wit,
ot,er regional />B firms in ot,er 2ountries as to ,a8e information on 2redit ,istories of t,ose 2rossing t,e
4orders.

Reference
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