A new report by consultancy firm, Financial Sector Deepening, has revealed that there are more than 213,000 Kenyans listed as loan defaulters with the credit reference bureaus.
The relatively big number, accumulated in a span of less than two years, has brought to the fore the use of customer profiles generated from their credit history to pre-qualify borrowers.
Metropol Credit Bureau managing director Sam Omukoko spoke to the Business Daily on the role credit bureaus play in the loans market.
What do credit reference bureaus (CRBs) do?
CRBs are organisations that help lenders to make decisions about potential borrowers by collecting the borrowers’ credit history and putting it in one organised format.
Most Kenyans are multi-banked, have Sacco memberships and each of these institutions have their credit history. So a credit reference bureau puts it in one profile.
That information is crucial to a lender who wants evidence that you can pay.
If the lender sees from history that you have been honouring your obligations he can even lend to you without collateral as opposed to a defaulter on whom they have to be more stringent.
The Central Bank of Kenya has licensed bureaus in the country — Metropol, and CRB Africa.
What are the common reasons why people are listed by the bureaus?
The most common reason is defaulting on loans, which according to the law is falling three months in arrears.
Others are those who have issued bounced cheques, suspected fraud (as long as proper investigations are done) and if you are taken to debt collecting agencies or to court.
Why do banks share negative credit information only yet one of the major benefits that could be derived from credit referencing is lower lending rates to good borrowers?
In the 1990s, banks had exposed themselves to political loans that weighed them down and when some collapsed, they realised that the banks had lent to the same group of people.
So the thinking was that if banks could know who these bad borrowers were they could kick them out of the system. This was the background when the law on information sharing was written.
The law currently provides for compulsory negative information sharing, with positive information sharing being optional.
Nobody is sharing positive information so far. But the negative information constitutes about five per cent of the industry data so 95 per cent of the banks customers are not in the bureau and a good borrower is not benefiting from the bureau.
Banks have come together on realisation that the benefits of the bureau will not be fully realised till they share positive information and we expect in the next three months we will have progressed to that level.
There have been complaints that banks are being defensive on the issue of sharing positive information. Why is this?
There have been fears that the platform may be used by competitors to poach good customers from their rivals but that is not the case as you can’t browse a bureau.
A competitor can only check details of a customer whom they have been in contact with either as a prospecting or existing client.
How can I get my credit report and are there charges for it?
The law provides that when listed you get a free report. Every year a listed person is entitled to one free report but beyond that you have to buy.
A report costs individuals Sh600 and between $2 and $5 for the banks depending on the depth of the analysis done.
Is there a guideline on the minimum amount that a borrower can be listed for?
What we deal with is the act of default, it has nothing to do with the amount, only the contractual obligation.
There are reports that banks are using the bureaus to collect debt, side stepping the legal processes. Is this true?
Yes, banks are using bureaus to collect debts. They have been able to weed out serial defaulters.
So the next immediate benefit for them is using the bureau as a threatening tool to collect debt.
That negative connection has made people fear the bureau, which is not a good thing.
Banks keep threatening that if you get listed you may not get a loan for seven years.
That is not what it means; only that someone will charge you a higher rate than a faithful payer.
What is the basis of the seven-year period?
The period of seven years is based on the fact that a debt remains enforceable through a court of law for six years so, the period caters for that.
What remedy does a borrower have if one is listed?
If you have been listed for falling into arrears, when you clear, the bank writes to us that the account is regularised.
We update bureau record from non-performing to performing — so then it’s a positive record. But anyone who visits your record in a period of seven years will see that you had a previous record.
Are there instants where you have received complaints from persons listed and what is the procedure of dealing with them?
There are times individuals are listed for reasons they don’t understand, for example, when charges are levied to their accounts and banks are unable to get to you to regularise such as a bounced cheque — banks are entitled to this amount.
The procedure is for persons with complaints to write to the bureau and indicate the cause of dispute.
The bureau institutes an investigation to ensure that it was not data capturing error and we have five days to do this.
Then the complaint is forwarded to the bank — the law gives them 10 days to have resolved the complaint.
So in 15 days, a query should have a response and if one is not satisfied one could raise the matter with the bank or seek an arbitrator.
There has been interest by other credit providers to be involved in the credit sharing platform based on the fear serial defaulters in the banking sector could turn to them. What has been the progress on this?
We are working with the micro finance institutions (MFIs) so that they are on board by August and Saccos by end of year.
The MFIs are coming as a closed user group so whoever is in the group will be able to share information but it mandates them to get consent from the customers.
A report by Financial Sector Deepening Kenya identifies legal court battles as a high risk for the growth of credit bureaus. Why is this so?
Litigation risk comes in two ways, one being if you do not obtain customer consent to share their details and second being inaccuracies which damage the customer’s reputation.