Justice James Makau rejected the push to suspend the order in a court fight that pitted the Central Bank of Kenya (CBK) and the State against the CRBs.
Data from the CRBs show that the bureaus can only share default data from less than 50,000 loan accounts of the 4.6 million blacklisted borrowers in the wake of the order from President Kenyatta.
The High Court has declined to stop the order from President Uhuru Kenyatta suspending the blacklisting of defaulters with loans of less than Sh5 million and sharing data of borrowers negatively listed with credit reference bureaus (CRBs).
Justice James Makau rejected the push to suspend the order in a court fight that pitted the Central Bank of Kenya (CBK) and the State against the CRBs whose operations have been hit after 99 percent of negatively listed accounts had their data frozen.
Data from the CRBs show that the bureaus can only share default data from less than 50,000 loan accounts of the 4.6 million blacklisted borrowers in the wake of the order from President Kenyatta.
This prompted the CRBs-- TransUnion and Metropol-- to join two traders in the suit that sought to force the CBK to reverse the order that suspended for one year a move to blacklist borrowers with non-performing loans of less than Sh5 million.
They argue the freeze on sharing data on loans of less than Sh5 million that were defaulted last year would stall lending to small and medium-sized businesses due to incomplete borrowers’ information.
The petitioners sought for the lifting of the CBK order barring unregulated digital mobile lenders like Tala and Branch from forwarding names of loan defaulters to CRBs and stopped the blacklisting of borrowers owing less than Sh1,000.
Justice Makau agreed with the CBK opposing the suit despite the banking regulator warning earlier that the freeze on blacklisting defaulters and sharing of data could trigger lenders to restart the rationing of loans.
He said the CRBs and the two traders-- Kathambi Ruchiami and Alex Gabriel-- failed to show or demonstrate how their rights would be violated if the legal notice is enforced.
"Additionally the petitioners have not demonstrated a prima facie case with any likelihood of success and that the substratum of the petition will be rendered nugatory if the conservatory orders are not granted," Justice Makau said.
"The respondents urge the disputed regulations enjoy the presumption of constitutionality. This has not been denied nor challenged. I find that remains a good law at this stage of proceedings," added the judge.
The respondents in the suit are the Treasury Cabinet Secretary, the CBK, the Attorney General and the head of public service, Joseph Kinyua.
The two traders and CRBs warned the order from Mr Kenyatta will collapse the credit information sharing that has existed since 2010.
They also fretted that it could lead to soaring costs of credit due to incomplete borrowers’ information and rationing of loans at a scale last witnessed between September 2016 and November 2019 when Kenya capped interest rates.
The CRB listing relief is part of a stimulus package to cushion distressed businesses and households from the effects of the Covid-19 pandemic, which has hit consumer demand and forced businesses to shed jobs and cut reduce operations.
The delinking of unregulated digital mobile lenders from CRBs came in the wake of public outcry over widespread misuse of credit information sharing. This means only banks like KCB #ticker:KCB , Co-operative Bank #ticker:COOP and NCBA Group #ticker:NCBA as well as micro financiers and deposit-taking saccos are allowed to blacklist defaulters with CRBs.
Firms such as Tala and Branch have been locked out at a time the bulk of accounts negatively listed are linked to mobile digital borrowers.
This cut off a huge share of people from CRBs when Kenyans had stepped up the use of credit reports when seeking loans or employment.
The requested reports jumped from 4.38 million in 2017 to 31.88 million last year, boosting the sales of CRBs that charge a fee for the filing.
"It will effectively collapse the credit information sharing framework. In addition, the directive will compromise the ability to secure credit from financial institutions," said the two traders and backed by the CRBs. Close to 99 percent of the 4.6 million loan accounts negatively listed with the CRBs have their data frozen.
The suspension restricts banks from using defaulters’ data to deny millions of Kenyans additional loans to grow their businesses or fund projects.
Job cuts
A third of Kenyan loan accounts are negatively listed as defaulted with the CRBs in an economy where Covid-induced job cuts and business closures have pushed thousands of people into a debt trap. Data from the CRBs show that the accounts negatively listed stood at 4.6 million out of the 15 million accounts, reflecting a jump from 3.2 million accounts in April last year.
Workers and businesses defaulted on bank loans worth Sh93 billion in the year to February following the imposition of stringent measures to contain the spread of the coronavirus.
Nearly 730,000 jobs were lost last year when Kenya imposed coronavirus-induced lockdowns.
