Commercial banks play a major role in economic growth and development through provision of credit to execute economic activities. Credit cards are financial payment instruments that are increasingly accepted and used in consumer credit market worldwide. However, credit card performance surveys shows that credit default poses a major risk to the commercial banks in Kenya. Mitigation against this risk is necessary for the safety and soundness of the banking sector. This study therefore sought to investigate the influence of socio-demographic, behavioural and economic determinants of credit cards default in commercial banks in Kenya. The study used secondary data containing socio-demographic, behavioural and economic details of credit cardholders obtained from bank records. The target population of the study were the eighteen credit cards issuing commercial banks in Kenya. The study used descriptive and correlational research designs which supported the study’s requirement to generate explanatory information about default in credit cards and also establish significant relationships between the explanatory variables and default in credit cards. Commercial banks issuing credit cards were stratified into three strata, namely; banks with international affiliation, banks where Government of Kenya has majority shareholding and banks owned by individuals. A sample of ninety five cardholders whose records contained all the variables of interest was randomly drawn from the sampled banks. Independent samples t-tests and Chi-Square tests were carried out to identify significant explanatory variables for default in credit cards. A Logistic regression model was then fitted to determine factors with high predictive power of default in credit card loans. The study established that age, approved credit limit ,payment of other loans and residential status of a cardholder were important socio-demographic, behavioral and economic factors respectively whereas gender, marital status, education level, income and occupation of a cardholder were unimportant in credit cards default in commercial banks in Kenya. From the study, younger cardholders (mean age of 44.18years) have higher likelihood (odds of 1.2) of default than older cardholders (mean age of 52.14 years), cardholders with other loan repayments are approximately ten times (odds of 9.77) likely to default than those without and there is an equal likelihood (odds of 1.00) of default for lower (USD 2247.2) and higher (USD 22471.9) approved credit limits. The study has extended the general understanding in literature on determinants of credit cards default by empirically establishing the risk factors and their marginal contributions to credit cards default. The need to establish other determinants of credit cards default either as moderating or intervening has been underscored. The study recommends further research on the moderating effect of such variables on credit cards default. Similarly the study recommends that credit cards application processing and evaluation should be based and aligned to the identified risk factors. There is also need to invest in programmmes to sensitize young credit card holders on the best industry practice for credit cards use so as to leverage on their benefits and reduce credit cards default. Finally the Government of Kenya should strengthen mechanisms for monitoring credit cards default trends and team up with industry players to reduce the cost of borrowing credit.
CHAPTER ONE INTRODUCTION
This chapter presents background of the study and the role of credit cards in economic development. The chapter also presents an in-depth description of the key determinants of credit cards default under study, namely socio-demographic, behavioural and economic determinants. Further, the chapter presents the statement of the research problem, research objectives and hypotheses of the study, scope of the study, significance of the study and the structure of the thesis.
Background of the Study
Consumer debt levels and non-business bankruptcy trends indicate that consumers are increasingly getting over-committed and overly-dependent on credit to supplement their consumption patterns (Olukunle & Simangaliso, 2012). However, consumer debt is two- faced.
On the one hand, the use of credit facilities in purchases can be mutually beneficial to both the buyer and the seller. For the retailer, it helps to promote sales as buying on credit constitutes an enhancement of the buyer’s purchasing power, thereby increasing demand, turnover and consequently profitability (Olukunle & Simangaliso, 2012; Beal & McKeown, 2006; Leonard, 2008). From the consumer’s perspective, availability of credit increases the purchasing convenience and raises the level of consumption and welfare of the buyer. This is supported by the fact that the consumer is able to buy and consume now at a spending level only feasible at a future higher level of income (Olukunle & Simangaliso, 2012; Bernthal, Mathew & Crockett, 2005; Kilborn, 2005).
At the national economic level, credit purchases can accelerate the pace of growth and development. First, the increase in spending has the effect of increasing the multiplier effect on income in addition to encouraging aggregate investment (Olukunle & Simangaliso, 2012). Increased income raises the level of expenditure and sets in motion a virtuous cycle of growth in consumption, investment, income and development (Olukunle & Simangaliso, 2012). Debt also helps to sustain such growth by making it possible for consumers to resist the downward adjustment of their consumption during a fall of their income (Marjo, 2010).
On the other hand, default in credit negatively affects the overall safety and soundness of the commercial banking system and impacts negatively on the general performance of an economy (CBK, 2014). Credit default leads to high borrowing and lending rates. The high lending rates restrict access to credit and generally increase the cost of doing business (FSD-Kenya, 2014). Lending institutions respond to credit default through credit rationing, higher interest rate, and shorter loan maturity. These in turn result in an inefficient allocation of credit, less efficient banking industry, slower economic growth and development (Muthoni, 2014; Wafula & Karumba, 2012; CBK, 2014).
The development of credit card as a payment instrument in consumer credit is probably the most significant phenomenon in the commercial banking industry (Simiyu, Mumanyi, Naibei & Odondo, 2012).
Since the first credit card was first issued in 1730, there has been a tremendous increase in use of plastic cards in the purchase of goods and services as corporate and individual consumers seek to avoid the inconvenience and risks of cash-based transactions, including fraud, robbery and violence.
Whereas many world economies have revolutionized their transactions towards paperless economy, it was not until early 1990‘s that local banks in Kenya started embracing the use of debit and credit cards (Simiyu et al., 2012). According to Timetric (2014), the global card market is dominated by two US-based players, Visa International and MasterCard.