Can Credit Reference Bureaus Mitigate Commercial Banks’ Non-Performing Loans? Lesson from Tanzania

Abstract

Creditors in Tanzania have been experiencing a problem of non-performing loans for a long time. Bank of Tanzania being the key regulator of financial sector confirmed the adoption of credit reference bureau in 2012 following the trust gained for these bureaus in addressing non-performing loans in different places around the world. The direction of this study is, therefore, to assess whether credit reference bureaus can mitigate commercial banks’ non-performing loans for the case of Tanzania. The study used panel data with in-depth information from all commercial banks in Tanzania. The results indicate that credit information pulled from credit reference bureau for credit decision is a good predictor of non-performing loans among commercial banks with a negative relationship. This suggests that information shared from credit reference bureaus have a wider possibility of reducing non-performing loans among commercial banks in Tanzania. On gauging the direct effects of information usage by commercial banks in mitigating credit risks, the study found that information about customers onboarding, screening loan applications, credit risk hedging, and loan repayment follow-ups relate negatively and significantly to non-performing loans. This outcome indicates that credit reference bureau is reliable in managing credit risks among commercial banks. Finally, the results show that bank specific factors particularly capital adequacy ratio and returns on assets significantly account for pronounced non-performing loans in Tanzania. Thus, to reduce non-performing loans Bank of Tanzania has to increase control of commercial banks in provision of credit services. Also, commercial banks have to work harmoniously with credit reference bureaus in exchanging and using credit information to reduce moral hazard and adverse selection. In addition, commercial banks must regularly evaluate their credit performance in relation to bank specific factors such as capital adequacy ratio and returns on assets.