Credit Information Sharing, Credit Growth and Bank Profitability: The Case of Lesotho

Moshoeshoe, Neko Thabiso

Credit Information Sharing, Credit Growth and Bank Profitability: The Case of Lesotho

Master Thesis

2019

Abstract

Credit extension plays an integral role in improving access to finance and financial inclusion by availing funds for borrowers while generating revenue for lenders and depositors. Borrowers’ delinquency and low risk appetite for lenders contribute to mediocre levels of credit extension. Information asymmetry problems in the credit market normally lead to banks refraining from lending optimally thus hampering credit growth and profitability. Lenders can benefit from rich borrower credit history to make informed lending decisions and realise returns. The purpose of credit reporting systems is to facilitate exchange of debtors’ credit information, thereby creating an opportunity for creditors to advance more funds and realise increasing profits while on the other hand, enabling borrowers to benefit from availability of loans. This study analysed quarterly data from 2007 to 2017 of banking industry in Lesotho to assess the impact of credit information sharing on bank profitability and credit growth using time series methods. The Johansen cointegation test was run to establish presence of long run relationship between variables following which the error correction model was applied to determine short run relationship. The results revealed no significant relationship between credit information sharing activity and bank profitability. There was however, a significant relationship between non-interest income and bank profits, highlighting ability of bank managers to diversify income streams. Furthermore, results showed negative and significant long-run relationship between bank credit growth and presence of credit information systems suggesting that banks were sceptical on lending given borrowers’ credit history. The study recommends that credit information from financial and non-financial institutions be fully shared with the credit bureau to enrich borrower credit reports. Public awareness on operations of credit bureau and potential implications of borrower credit history will instil discipline among borrowers and eventually improve of loan book quality.

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