Relook new CRB regulation on banks

In his book, “The End of Alchemy, Money, Banking and the Future of the Global Economy”, Mervyn King – the Governor of the Bank of England from 2003 to 2013, uses the concept called the Maradona theory associated with the Argentine football legend Diego Maradona to explain how similar monetary policy works.

Now, in the 1986 World Cup held in Mexico, Maradona is known for scoring the “hand of God” goal where he deliberately punched the ball into England net and got away with it. In his second goal which is less talked about but the most brilliant one, Maradona ran 60 yards from inside his own half beating five players and shot into the English goal.

The cameras positioned above the stadium showed that he virtually ran in a straight line, but English defenders reacted by expecting the typical Maradona to move left or right. Mervyn King uses this illustration to explain that in recent years central banks have been able to influence the path of the economy without making large moves. They simply went straight for their goals.

Last week, a new credit reference bureau (CRB) regulation was announced where banks, saccos and micro-finance lenders will face a fine of Sh2 million for every defaulter they deny a loan for being listed negatively with the credit reference bureaus.

The regulation is an attempt to unlock credit to hard hit firms and individuals impacted by the coronavirus pandemic. Despite the Monetary Policy Committee revising down the CRB and CRR to free up more funds for commercial banks to lend, financial institutions have been reluctant to offer loans to more than 2.5 million Kenyans negatively listed with the CRBs.

Looking at this policy from a Maradona theory perspective, CBK and Treasury seem to be running straight for the goal but not the right goal post.

Credit referencing is an integral pillar to the credit market because lenders are able evaluate their risks and to price loans according to the credit history of the individual, which basically means CRB enables them to price risk effectively.

Apart from that, CRB is the credit model that digital lending entirely runs on because it’s able to check on over-indebtness of borrowers which is the biggest risk to the sector. But reviewing CBK and Treasury recent policy moves suggest that they are getting rid of the credit referencing mechanism but not explicitly coming out to say so.

First, they locked out digital mobile lenders from forwarding names of defaulters which they had a case because digital lenders have misused the CRB. And now it’s asking financial institutions to bypass the use of the CRB mechanism.

Banks, saccos and micro-finance lenders are debt merchants who make a large share of profits from loan interests, so its inherently embedded within their business model to lend more.

So, when they hold back on lending it’s because the risks are high, they are cautious of the non-performing loans tying up their capital which for deposit-taking institutions a big part is not their own but customer deposits.

The underlying problem here is asymmetrical information in the credit market which financial institutions are using to review loan application of eligible customers who are negatively listed.

So, what Treasury and Central Bank should do is to make credit reference bureaus efficient by enforcing better reporting where all lenders should report all the positive listing (repayments) in real time and same day basis.

Available data shows that borrowers actually repay on time, but they are not reported by lenders, especially digital lenders, and this is information needed by other lenders. Instead, the failure of reporting has led to many being locked out of the credit market.

So, creating an efficient credit referencing framework will have the Central Bank heading straight towards the goal of improving access to the credit market, if I am to use Mervyn analogy, and will even help regulate digital lenders better when they come back on board.