Banks’ queries on loan defaulters hit 1.8m

Banks’ requests for the credit history of borrowers increased by 15 per cent in three months to June, hitting a total of 1.8 million since credit reference bureaus were licensed two years ago.

A report by the Central Bank of Kenya (CBK) shows that the number of credit reports requested by lending institutions increased by 231,197 between March and June.
Banks normally request for borrower’s credit repayment records when evaluating their loan applications.

The law allows banks to classify borrowers who have fallen behind their loan repayments by 90 days as loan defaulters and to submit their names to credit reference bureaus.

“The introduction of credit information sharing has strengthened credit appraisal standards,” said CBK in the report.

“It is also expected that credit referencing will go a long way in inculcating credit discipline in borrowers,” the regulator added. Banks have submitted names of more than 200,000 defaulters since credit referencing was introduced in 2010, locking them out from accessing loans or making it more expensive for them to borrow.

It takes at least seven years after full payment of loans for a defaulter’s name to be expunged from the bureaus’ database.

Credit referencing is designed to weed out defaulters and make it cheaper for good borrowers to access loans by leveraging on their repayment records, but Kenyan lenders only submit information on delinquents.

“The law was amended to allow the sharing of negative information only, sharing of positive information remains voluntary,” said Habil Olaka, CEO of the Kenya Bankers Association, a lenders’ lobby.

The Finance Bill 2012 is, however, set to pass an amendment that will compel banks to also share information on good borrowers. Negative credit history does not, however, necessarily lock out defaulters from accessing credit.

“Banks should use the information to rate credit worthiness and may use it to set a higher repayment rate or may decline to advance the credit,” said Mr Olaka.

The number of individual bank customers requesting for reports stood at 10,032 up from 7,603 in March. Individuals who want their credit reports are required to visit offices of credit reference bureaus in Nairobi to get a credit report or lodge a complaint. Mr Olaka said that banks that submit names of defaulters to the bureaus were also supposed to notify them.

The Consumers Federation of Kenya (Cofek) said it had received numerous complaints concerning credit bureaus.

“The issue of CRBs (Credit Reference Bureau) acting unethically and being seen to be departments of certain banks make up about 35 per cent of the banking and financial sector consumer complaints,” said Mr Stephen Mutoro, the chief executive of Cofek. “Information forwarded to the bureaus is not shared with consumers, raising chances of one being blacklisted on the basis of incorrect data,” said Mr Mutoro.

He said that the CRB law is not in line with the Constitution and infringes on the rights of consumers.

“The most important aspect is that the CRB regulations 2008 were anchored on a subsidiary legislation and not an Act of Parliament given the weighty nature of that legislation,” said Mr Mutoro.