Credit access behind push for bureau

The main objective of adoption of credit information sharing in Kenya is to increase access to credit.

The benefits of credit access and cost effectiveness of that credit to development at the firm level and at the household level is key.

Credit information sharing will facilitate the development of information capital.

The risk premium associated with information asymmetry will henceforth be eroded. This will allow cost of credit to decline substantially.

Information capital will change the current collateral technology.

Credit by the banking sector in Kenya has to a large extent been underwritten by physical collateral such as land and buildings and costs of evaluating that collateral – with inappropriate definition of property rights.

Borrowers without access to such collateral have been constrained from accessing credit.

Information sharing

Credit information sharing will thus enable borrowers to build a track record that they can use to access credit.

This will especially be pertinent to those borrowers in the informal and Small and Medium Enterprises (SMEs) who have a track record and good performance to use their reputational capital to access credit.

The third benefit is to enhance information symmetry and support financial development.

The existing state of information asymmetry between borrowers and banks is a constraint to innovation and financial sector development.

Two important outcomes in information asymmetry are the moral hazard problems from the borrowers and adverse selection from the banks.

These two problems punish the economy with low provision of credit.

Fourth, in a segmented market like Kenya’s, some segments remain untapped because banks do not have adequate information to price suitable products.

In part this has also contributed to the high cost of credit. Borrowers have had to bear a “risk premium” because of this lack of information.

It is therefore the Central Bank’s expectation that savings arising from the increased credit information shall translate to lower cost of credit.

In turn, more Kenyans will be able to access credit from banks.

The Monetary Policy Committee’s efforts since September 2009 to signal to the market the need to expand credit to the private sector at affordable interest rates has not yielded the desired results.

Banks have continuously cited structural rigidities as impeding their wish to lower interest rates.

With credit information sharing, it signals the seriousness with which their concerns are being addressed.

Banks should henceforth pass the accruing benefits to the Kenyan public through appropriate reductions in the cost of credit.

The current level of interest rates is a combination of costs; risk premium most of it unrealised goes to profits; our legal system with delays and lack of clear enforcement of contracts; and of course banks’ profit margin.

High interest rates increase the level of default risks.

With good credit track records, the risk premiums and search costs imposed on customers will ideally shrink.

We expect that credit information sharing will be an incentive for good credit behaviour that will attract competitive pricing of credit facilities.

Now, more than ever before, there will certainly be benefits accruing from adhering to the contractual terms of loans.

Credit information sharing will increase vibrancy in the market for borrowers and lenders.

Borrowers will be able to access enhanced facilities at competitive prices, as they grow their credit histories and track records.

Conversely credit providers will be able to develop new and competitive products that will tap into previously unserved and underserved market niches with the power of available information.

This can only positively affect the banking sector and the Kenyan economy as a whole.

The vibrancy of the credit market implies availability of resources for the productive sectors of the economy to exploit the otherwise moribund opportunities.

But we should also not forget it is the end of the road for serial defaulters who took advantage of information search costs and information asymmetry to defraud banks and individuals - including bouncing cheques for lack of funds.

The role of easily accessible and affordable credit in economic development need not be overemphasized.

However, most banks finance their credit with short term deposits which constrains their credit structures to mainly short term formats.

This is even more punishing because the overdraft facilities for working capital are also short-term and very costly.

We thought with a vibrant bond market, this traditional mismatch would go away!

In an effort to address the mismatch, a Technical Committee has been formed by the CBK to look at proposals for Development Banking Products or development loans with longer terms than the current loans in commercial banks.

The key target markets for the Development Banking Products are the SMEs with huge growth potential.

To further address the structural rigidities in pricing of credit, CBK will later in March 2010 launch a study report on collateral system and associated costs in Kenya.

The study, jointly commissioned by Kenya Bankers Association, CBK and Financial Sector Deepening (FSD) Kenya, is aimed at establishing the current status on creation, perfection and enforcement of collateral in Kenya.

Market players

CBK in collaboration with the Government and the market players will enhance its efforts in addressing other structural rigidities that contribute to market inefficiencies to take stock of developments as well as other emerging constraints.

The banking sector credit information sharing initiative should serve as a model for other credit and utilities providers.

CBK will engage other players to ensure that we move with speed to rope in other financial and non financial credit providers.

The Micro-finance Act was amended vide the Finance Act, 2009 to permit credit information sharing.

Inclusion of all stake-holders will allow the full benefits of credit information sharing to permeate the whole economy.

Prof Ndung’u is the CBK Governor. Excerpts of a speech he delivered during the launch of the first licensed Credit Reference Bureau––CRB Africa.