Banks, microfinance institutions and savings and credit cooperative societies (saccos) that refuse to lend to borrowers with a negative credit history will face financial sanctions of Ksh2 million ($16,666.66) as President William Ruto’s administration intensifies war against credit starvation in Kenya.
In addition, over four million digital loan defaulters will be expunged from the blacklist of borrowers in data collection agencies effective November 1, marking the beginning of a major shakeup in the operations of the country’ s Credit Reference Bureaus (CRBs).
President Ruto during his inauguration speech on September 13 directed CRBs to review their operating model away from blacklisting loan defaulters to a graduated system of credit score rating.
The president argued that ‘blacklisting’ has ‘unfairly’ excluded millions of Kenyans from the formal credit system and denied others job opportunities.
Banks, however, said failure to share negative information on borrowers will lead to a resurgence of bad loans and hinder disbursement of new loans.
Need for disclosure
The banks, through their lobby group Kenya Bankers Association (KBA), said full information disclosure on borrowers is important in reducing the extent of information asymmetry between banks and borrowers, which is essential in credit appraisal process.
“Whereas the impact of financial service providers being curtailed from sharing negative information will not be immediate, its effects will no doubt constrain issuance of new credit,” said Habil Olaka, KBA chief executive.
“Banks extending credit without full information about customers’ risk ballooning their non-performing loans, which have detrimental effects on their soundness and stability,” he added.
President Ruto’s push for a policy shift in CRB operations is underpinned by the Banking (CRB Regulations) 2020.
The regulations provide that every credit bureau must develop a credit score for each borrower whose credit information has been submitted and that the credit score must be computed using details and method prescribed by the Central Bank of Kenya.
According to the regulations, credit reports should not be used by financial institutions to deny customers loans but should inform the decision-making process when determining an application for credit.
“An institution that denies a customer a credit facility or any other financial service solely on the basis of a credit score shall be liable to a monetary penalty of Ksh2 million ($16,666.66) or such other sanctions under the Act, the Microfinance Act 2006, or the Sacco Societies Act 2008, as the Central Bank may impose,” the regulations say.
“Each institution shall consider a customer’s credit score in appraising a customer’s credit application and in the pricing of a credit facility.”
CRBs are required retain the credit scores in their possession for at least five years.
Campaign promises
Last week President Ruto, who is keen to fulfil his campaign promises, directed CRBs to stop ‘criminalising’ borrowers who fail to meet loan obligations but instead give them a chance to manage their debts.
“I’m happy Governor (Central Bank Governor Patrick Njoroge) has told me they are having engagements with CRBs so that we can change the credit listing mechanism to, instead of blacklisting, we can have a graduated mechanism that allocates scores on every citizen that is borrowing in the manner in which they have borrowed and the manner in which they have paid back. That is a universal principle for rating people on matters of credit.
“That development is a very positive development for the millions of people who suffer great loss; they are excluded from formal borrowing, and they are also excluded from many other things,” President Ruto said.
“Governor please explain to our good friends in the CRB space that we are not against CRBs, no. Our position is that we should change the model of listing so that we do not make it an all or nothing and we do not criminalise; we do not unfairly disadvantage borrowers but we give them an opportunity to be rated so that we have a graduated system that can assist all Kenyans.”
He spoke in an event that saw Safaricom and its partner banks (KCB and NCBA) announce a 50 percent tariff reduction on its emergency and short term overdraft service dubbed ‘Fuliza’.
The facility launched in 2019 allows Safaricom’s M-Pesa customers to complete transactions even when they do not have sufficient funds in their accounts.
The banks also announced that four to five million Fuliza defaulters will be delisted from CRBs effective November 1.
“In the past several months Fuliza was a very popular word in our campaign, and I’m happy that you were listening,” Dr Ruto said.
Kenya introduced credit information sharing on borrowers in 2009 to help control the rising volume of bad debts.
This followed the Banking (Credit Reference Bureau) Regulations, 2008 which became operational in February 2, 2009
Gauging risk
“Virtually, all banks use credit scores —thought at varied degrees — to effectively gauge customers’ creditworthiness and the appropriate prices to be applied on loan applications,” KBA said.
“Without credit scores, banks use any other information (which varies from bank to bank) to determine what customers qualify for and the interest rates to be charged alongside their other internal credit policies. In extreme cases where information lacks, banks can resort to loan denials.”
CRB Regulations (2020) also abolished CRB clearance certificate fees for first time applicants and set the minimum volume of non-performing loans that qualifies to be listed with the CRB at Ksh1,000 ($8.33)
The bureaus charge around Ksh2,000 ($16.66) per clearance certificate, a source of revenue that has been severely impaired after the directive.
The National Treasury through its National Policy on Credit Information Sharing dated September 2019 said banks are not keen on the use of credit information, in a move that is likely to shut another revenue stream for CRB operators.