The central bank has put commercial banks, who are abusing credit reference bureaus (CRB), on notice that they will henceforth be subjected to tough sanctions, including heavy fines, for misuse of the information sharing tool.
In a circular dated August 10, 2016 and sent to all commercial bank chief executives, the Central Bank of Kenya (CBK) says it has received multiple reports of CRB abuse, including blacklisting of customers for failure to pay non-credit-related fees.
“Some institutions have not been submitting accurate and complete data to the bureaus. Certain banks have been sending threatening messages to list customers for non-credit-related matters contrary to the law,” the CBK says in the circular signed by the director of bank supervision, Gerald Nyaoma.
Banks have been forwarding names of customers for amounts as low as Sh500 related to transaction fees such as processing of ATM cards and account closure charges.
CRBs have sought to absolve themselves from rampant errors in the credit reports, noting banks are the originators of the information.
“Based on the number of complaints it is obvious that the quality of data coming from banks needs further attention,” said Metropol CRB managing director Sam Omukoko.
The CBK circular further notes that commercial banks have been forwarding negative information about customers without warning the concerned customers or alerting them after the listing. Such action is punishable by a fine of up to Sh1 million or an administrative sanction the regulator may consider appropriate.
Secret listing has seen thousands of bank customers blocked from the credit market without their knowledge and most only come to know of it when their application for loans is rejected.
Banks are required to issue a month’s notice to a borrower before the loan falls to default category. The lender is also required to inform a borrower of the negative listing within 30 days of the information being submitted with the reference bureaus.
The CBK notes that banks are expressly denying credit to those who have been negatively listed with the bureaus when that was not the intention of credit information sharing.
“It was never the intention of using the credit information sharing mechanism as a blacklisting mechanism, but as a risk management tool,” Mr Nyaoma says.
Since the introduction of the credit information sharing mechanism seven years ago, banks have mainly used it to punish customers with a bad credit history but are yet to reward loyal borrowers, raising queries over its relevance to consumers.
Rampant misuse of credit information sharing has most recently exposed banks to numerous legal battles with aggrieved customers some of who have sued for heavy damages.
One consumer Peter Kimani Runo has petitioned Parliament to disband the credit bureaus, citing rampant abuse by banks.
Information from the bureaus has become a major item in loan appraisal processes of most banks.
The majority of lenders demand that negatively listed borrowers first clear with the lender who listed them and wait for three months to qualify for a new loan.
Mr Nyaoma says credit information sharing has particularly helped banks to recover amounts they had previously written off as bad loans.
CBK data shows that 12,546,983 reports have been requested by banks since information sharing was introduced in 2010.
Bank customers, who are entitled to one free credit report each year, have made 177,450 requests, indicating they do not put as much emphasis on information sharing as the banks do.
Some companies have started asking applicants for certain jobs to submit certificate of clearance from credit bureaus, driving up the number of individual requests.
Individuals pay Sh2,000 for the clearance certificates.
Banks, which are currently under pressure to lower interest rates, have pledged to use positive credit rating information to offer cheaper loans to good borrowers within a year.
Mr Omukoko said that the bureaus have rating scores for everyone whose information has been forwarded to them and the lenders do not require one year to put it to use.
“Scores are available unless the banks want to generate own internal scores,” said Mr Omukoko.
Abuse of credit information sharing has not left the banks unscathed as the courts have made significant judgements against the lenders for abuse of the scoring tool.
Early this month KCB was ordered to pay Sh800,000 to a former employee, Allan Mbindyo Odhiambo, for wrongful listing with a credit bureau as bad debtor.
Mr Odhiambo had been denied a loan by Standard Chartered Bank because of the adverse listing, prompting him to sue KCB.
In 2014 Obadiah Gitonga Micheu sued Co-op Bank for listing him because of non-payment of a loan in which he was a guarantor.
Kennedy Odhiambo Nyagudi, a former Kisumu Town West MP, has also sued Barclays Bank of Kenya and KCB for listing him with the bureaus without his knowledge, prompting other banks to deny him credit.
Mr Omukoko attributed the number of court cases to poor understanding of the complaint mechanism.
As per the regulations a customer whose information is erroneous has to complain to the bureau, which has five days to counter check with data received from the bank to ensure its accuracy.
If the error did not occur at the bureau, the complaint is forwarded to the bank, which has 10 days to investigate the issue.
If erroneous the bureau is required to remove such information from its records immediately and if not the matter must be forwarded to an arbitrator under the alternative dispute resolution mechanism formed recently by Kenya Bankers Association.
Negative information filed with credit reference bureaus remains part of a borrower’s history for a period of five years.