Borrowers who faithfully service loans will in less than three months benefit from positive sharing of information among banks, ending the exclusive use of credit bureaus as scarecrows for bad debtors.
The Business Daily has established that the two licensed bureaus in the country, Metropol and American-owned TransUnion, have started piloting positive information sharing, whose success will see good debtors lower their borrowing and collateral costs starting June.
Up to now, the bureaus have been largely used as debt collection tools by the lenders.
The 43 banks have been sharing only details of loan defaulters, preventing the credit referencing from achieving its full potential of expanding credit access and reducing costs.
A key objective of credit referencing at its introduction four years ago was to reward faithful borrowers with access to credit without collateral requirements and at lower rates as they are deemed less risky.
“Banks are using CRB as a debt collecting tool, that is why it is not affecting pricing or expanding lending. With positive information we will generate credit scores and that profile becomes a bargaining power; it allows the borrower to engage the lender,” said Sam Omukoko the CEO of Metropol Credit Reference Bureau.
Loan defaults in the country are currently at 4.5 per cent, or Sh61.6 billion, indicating that the bulk of information on borrowers other than defaulters has not been shared four years after the introduction of the system.
Credit reference bureaus have been upgrading their system to increase their capacity. Banks have also been upgrading to ensure that they are able to extract information to be submitted to the bureaus.
“We will move away from the negative connotation that it is a blacklist and the consumer can see that they can use it for their benefit,” said Habil Olaka, the CEO of Kenya Bankers Association.
As at September last year the number of credit reports requested by institutions stood at 2,036,634 while those by individuals stood at 13,510. The gap underlines the variance in importance attached to the reports by banks and customers. Lending institutions have made the reports an integral part of their customer appraisal process with each customer being vetted.
Other institutions, including political parties, have also demanded the reports before engaging with individuals, which accounts for the bulk of the individual requests.
Pricing by banks is currently product-based. It, however, remains to be seen how the banks will implement the individual-based pricing.
The credit score ranges between 100 and 900 with a score of between 100 and 400 indicating that the individual has defaulted in a payment in their past. A score of 401 to 600 indicates one has not defaulted but their level of debt to income is considered high, and is considered fair.
A score of 700 to 800 is considered good while above 800 is excellent, and indicates prompt payments and long credit history. A person who has no credit record is not awarded a credit score.
A borrower is entitled to one free credit report a year but any consequent report is charged a fee of Sh500. The credit bureaus have upgraded their systems allowing customers to pay for the report using mobile phones and access the report online. To promote access to the credit reports, credit bureaus are allowed to engage agents to distribute the reports.
Credit referencing has also been expanded to include deposit-taking microfinance institutions, Saccos and utility companies.
However, deposit-taking microfinance institutions will initially share negative information only. The Sacco Act is yet to be amended to allow for the sharing of information between Saccos and banks.
Credit-only microfinance institutions are working towards having a closed-user group allowing them to share information.
In the recent General Election political parties required a clean credit report before nominating an individual to vie for a seat. This was after Parliament watered down the integrity standards in Chapter Six of the Constitution, which had made a clean credit record a mandatory requirement.
“Most government commissions are asking for those clearances and the counties have also started. I have seen several people who are seeking appointments coming for the reports,” said Mr Omukoko.
Though banks offer unsecured loans to people employed by the government or blue-chip companies based on their salaries other customers, mainly those at the bottom of the pyramid, are limited to collateral-backed loans.
Introduction of the credit referencing, besides costs, was meant to widen access to credit.
The banking sector has 15 million deposit accounts but two million loan accounts, indicating that approximately 13.3 per cent of those saving with the banks approach them for loans. In the Sacco industry, loans account for 75 per cent of the total assets.
Lack of collateral has been identified as a major hindrance to the uptake of loans. But borrowing without collateral relieves the customer from incidental expenses associated with valuing the asset and putting a legal charge on it so that the bank can dispose of the property in case of a default.
Unlike Kenya governments in countries such as Germany and France own the credit reference structure to ensure wide access to credit. Access to credit boosts local investment and consumption, which are key drivers of economic growth in any country.
Though CBK does not keep track of the number of persons listed with the bureaus, a research by Financial Sector Deepening (FSD) indicates that over 213,000 people had been listed by April, 2011.
FSD had warned that prolonged sharing of negative information only end up demonising credit referencing and beating the purpose of its introduction.