Effect of Credit Reference Bureaus Functions on Financial Performance of Savings and Credit Co-operative Societies in Kenya

Abstract

The main objective of the study was to establish effect of credit reference bureaus functions on financial performance of SACCOs in Kenya. Specifically, the study sought to establish the effect of credit cost function, information sharing function, moral hazard function, risk assessment function and intervening inflation effect on financial performance of deposit taking SACCOs in Kenya. SACCOs enable members to access loans in which the youth have been employed directly or indirectly to earn a living. The existence of information asymmetry has led to the need for credit reference bureaus to check on loan defaults. SACCOs in Kenya are facing an imminent crash due to high default rates thus affecting their financial performance; a situation that prompted to this study. Theories used were information sharing, adverse selection, moral hazard and micro-loan borrowing rates and default. The study adopted a descriptive research design. Descriptive statistics was chosen since it utilizes data collection and analysis techniques that yield reports concerning the measures of central tendency, variation, and correlation. The target population of the study was 181 SACCOs registered by 2014. Stratified random sampling technique was used to select a sample of 135 licensed deposit taking SACCOs as at 31^st December 2014. Secondary data from publications, CRBs, journals and financial records was used. Primary data was collected using structured questionnaires which had both close ended and open ended questionnaires. The study conducted various tests including normality test, multicollinearity, stationarity, heteroscedasticity and autocorrelation tests. Additionally, mediation test was conducted and it satisfied all the four conditions thus the hypothesis that inflation has an intervening effect on the relationship between credit reference bureaus functions and financial performance was supported. The study found out that CRBs functions (credit cost function, information sharing function, moral hazard function and risk assessment function) and financial performance were positively related and significant. The findings showed that moral hazard function had the largest influence with a coefficient of .326 on financial performance followed by risk assessment (.271); credit cost (.269) and information sharing (.253). The study concluded that CRBs functions have a positive and significant effect on financial performance of SACCOs in Kenya. The study recommended the establishment of a clear and elaborate regulatory framework to ensure that consumer complaints are fully addressed so that CRBs do not turn out to be punishing institutions for loan defaulters. Further it recommended the introduction of a strong bureaus board of directors with various relevant professional skills to oversee credit policies and procedures so that there could be uniformity and fairness for all the parties involved. Also the regulating authorities should be given more powers and resources to carry out effectively their regulating and supervisory credit reports. This study was carried out to contribute to the growing knowledge in the field of finance especially the area of CRB functions towards improving financial performance of deposit-taking SACCOs. Future researchers could also consider expanding the scope of the period to ten years or when the CRBs increase from the current three. Researches could also be done on effect of credit reference bureaus functions on mortgage finance institutions.