Nearly a third or slightly more than one million borrowers will be removed from the country’s credit reference bureaus (CRBs) following the central bank’s order to spare defaulters with unpaid loans of less than Sh1,000.
The move will enhance the borrowers’ chances of being able to borrow more in the latest cleanup of the CRBs’ blacklist—which has about 3.2 million Kenyans that have been negatively listed.
Commercial banks, regulated digital lenders and saccos have been barred from listing defaulters who borrowed less than Sh1,000 or have been unable to clear balances that are less than the set amount.
Data from Kenya’s three CRBs — Metropol, TransUnion and Creditinfo International-- show that the accounts that were negatively listed had jumped from 2.7 million last year, a significant number of them linked to mobile digital loans of less than Sh2,000
Metropol Managing Director Sam Omukoko said that the Central Bank of Kenya (CBK) is still working out on rules on whether those who were negatively listed for unpaid balances of less than Sh1,000 qualify to be removed from the blacklist.
“There are 5.1 million unique borrowers with balances below Sh1,000, out of which 1.06 million are negatively listed by MFIs (micro finance institutions) and fintechs,” Mr Omukoko said.
“We are still working with CBK and refining the numbers because some had borrowed say Sh10, 000, repaid a large portion of the loan only to get to Sh900 and failed to pay,” he said.
Non-performing loans in the banking industry rose to 12 percent last year, from 9.5 percent in 2017, CBK shows, remaining in double digits for the first time since 2007.
This has triggered property seizures by banks and an increase in the number of defaulters reported to CRBs, hurting the borrowers’ chances of being able to borrow more.
Majority of the negative listings were for borrowings tapped through mobile phones with the average loan owed by the defaulting digital borrowers at Sh2,500.
Kenya has witnessed a proliferation of digital lenders targeting the banked and unbanked alike, saddling borrowers with high-interest rates and leaving regulators scrambling to keep up.
Market leader M-Shwari, Kenya’s first savings and loans product introduced by Safaricom and Commercial Bank of Africa in 2012, charges a “facilitation fee” of 7.5 percent on credit regardless of its duration.
On a loan with a month’s term, this equates to an annualised interest rate of 91 percent.
Tala and Branch, other top players in the mobile digital lending market, offer interest rates of 12.7 percent and 7.6 percent respectively for a loan borrowed over one month. The Tala loan equates to 153 percent over a year.
Under the new rules, CBK has stopped unregulated digital mobile lenders from forwarding defaulters’ names to CRBs.
CBK said that disconnecting unregulated digital mobile lenders from CRB was linked to public outcry over widespread misuse of the credit information sharing (CIS) mechanism.
This means only banks like KCB, Co-operative Bank and NCBA Group as well as micro financiers and deposit-taking saccos will be allowed to blacklist defaulters, locking out firms like Tala and Branch
“The withdrawal is in response to numerous public complaints over misuse of the CIS (credit information sharing) by unregulated digital and credit-only lenders, and particularly their poor responsiveness to customer complaints,” the regulator said in a statement on Tuesday. “Thus, unregulated digital and credit-only lenders will no longer submit credit information on their borrowers to CRBs.”
This came as CBK Governor Patrick Njoroge announced that the suspension of CRB listing for loans that were defaulted from April 1 and the relief from blacklisting would last for six months.
The CRB listing relief is part of a stimulus package announced on March 25 to cushion distressed businesses and families from the effects of Coronavirus, which has hit consumer demand and forced businesses to shed jobs and cut back their operations.
The latest CBK data shows that loan defaults increased 55.6 percent in the three years to December, hitting Sh333.3 billion or 12 percent of Sh2.77 million loans advanced.
Bad loans as a share of total credit advanced stood at 5.6 percent and 6.8 percent in 2014 and 2015 respectively, a pointer to the bankers’ deteriorating loan book
This emerged in a period when Kenya’s struggling economy has resulted in job cuts and near stagnant wages, leaving thousands of people in a debt trap.
Thousands of workers have taken out loans worth billions of shillings, mostly without collateral, for short-term needs like buying furniture, vehicles and urgent family expenses like healthcare.
Default rates are expected to jump in the wake of the coronavirus pandemic that has hit consumer demand and forced businesses to shed jobs and cut back their operations.
The impact of social distancing and restriction of businesses like schools, bars and restaurants has also impacted on consumer spending, setting the stage for job cuts and unpaid leave to workers that ultimately point to bank defaults.