Stop abusing credit reference reporting plan

Woe unto you if you find yourself on a list of defaulters with a credit reference bureau. It does not matter whether it is a technical default or a mistake that is not of your own making.

We have totally bastardised the whole concept of sharing credit information by turning what was supposed to help and give consumers better access to credit into a sword that banks hold over their heads all the time.

I think that we are at a point when we must go back to the reasons we introduced credit reference bureaus in the first place- and to scrutinise the credit reporting framework for fitness and for purpose.

In the build up to the just concluded elections, front offices of credit reference resembled marketplaces bursting with political aspirants seeking to be given a clean bill of health.

Why are we misusing credit reporting and subjecting consumers to arrangements that are patently contrary to what the framers of the credit referencing framework we have today wanted?

This thing was supposed to be about sharing of credit information between licensed financial institutions. Today, you are required to table your credit score before you can be considered for some key jobs in the public sector.

Yet the truth of the matter is that the framers of the rules and regulations did not want credit information to be shared with employers.

The framers conceived credit reporting as a journey that was supposed to start with stopping serial defaulting from borrowing money from multiple banks.

This is why we started by introducing negative file –reporting- namely creating a database of loan defaulters in a central credit reference bureau.

But the purpose was that banks would use that information in helping them price risk. The objective was not to lock the consumer out of the credit market.

It was just to allow the bank to be more aware and to enable and empower the creditor to understand the consumer better.

Negative reporting was meant to be mainly about removing information asymmetry and help banks price risk better.

The framers assumed that-over time- the consumer who invested in building up a good repayment track record would enjoy lower rates compared to people with a default in their records.

The thinking was that within a period of about seven years we would then progress to reporting on good repayment as opposed to mere negative reporting - what they call full file reporting in their own jargon.

Reading through the concept paper and the work that informed the crafting of the framework, it emerges that three important decisions were included in the design.

READ: Misuse of credit rating barring access to loans

First, the framers chose the route of licensing and registration of private credit reference bureaus instead of a public CRB at the Central Bank as is the case in Uganda and Argentina.

Secondly, they decided to restrict credit reporting only to licensed financial institutions.

Thus, this idea that you have to get clearance from a CRB before you can be allowed to run as a Member of Parliament has no leg in the CRB framework as conceived by the framers.

Where did the rain started beating us? It is when banks started misusing credit reporting as a blunt tool and weapon for threatening consumers. The message from the bank to the consumer is terse: ‘‘If you default, I will lock you out of the credit market’’.

Non-financial institutions and state agencies that insist that you have to be given a clean bill of health from a CRB before you can be employed also stand accused of misusing credit information.

For the systems to work, banks will have to demonstrate better preparedness to us; both the carrot and the stick.

Consumers who have good repayment records are not enjoying this thing.

I think that mobile money lenders learnt the lesson and introduced a completely different matrix to come up with credit score, including air-time usage and volume of M-Pesa transactions.

With a broken credit market, the economy will find it difficult to achieve full potential.