Columnists

Reconsider Uhuru’s order on CRBs

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Central Bank of Kenya. FILE PHOTO | NMG

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Summary

  • Protecting small borrowers from the impact of Corvid-19 is a good thing.
  • Businesses can only thrive in a stable environment and where changes in the law are predictable.
  • In April last year, the government suspended listing of a category of borrowers for six months and set the minimum threshold for negative credit information to CRBs at Sh 1,000.

I am appealing to President Uhuru Kenyatta to reconsider his latest order on credit reference bureaus (CRBs).

Plainly, it amounts to an order to credit rating bureaus to erase from their records the default history of all lending falling below Sh5 million.

It also amounts to an order to lenders not to inquire about information on this category of defaulters. We are slowly but gradually breaking the CRB business model. It started with denying digital lenders access to CRB data and stopping these institutions listing categories of small borrowers.

I must confess that I supported the move on digital lenders. These Merchants of Venice operated with opacity and with no mechanisms for customer complaints. But the unintended consequence was that we started to gradually degrade the CRB product.

Protecting small borrowers from the impact of Corvid-19 is a good thing. But must we do it when what we end up with is creating confusion in our credit markets? Can’t we see that we risk undermining a framework for exchanging credit information that has been working fairly well since 2010?

Businesses can only thrive in a stable environment and where changes in the law are predictable. In April last year, the government suspended listing of a category of borrowers for six months and set the minimum threshold for negative credit information to CRBs at Sh 1,000.

On Wednesday, the President issued new edicts. We are headed to a situation where credit information sharing will no longer be meaningful.

When you leave out a category of borrowers out, how will CRBs manage to aggregate all the borrowing that a customer has done from multiple institutions — for example, a bank, a digital lender and a sacco.

What is the point of credit information sharing when a CRB is not able to have a single view of a customer? This thing is being degraded to the point where it is no longer going to be useful for credit decisions.

And it terms of access to credit to the small borrowers and SMEs,what we are doing may end up being counterproductive. I say so because the only collateral a small man who borrows from M-Shwari or KCB M-Pesa is information.

More and more, we are in a world where most of the lending is based on credit history. The borrowing limit that M-Shwari gives you is based on the positive or negative data the lender can access about you and from the transactions you engage in. When you lock out SMEs from the credit information sharing system, are you really helping them?

And, the more you make it difficult for lenders to extend loans, the more they will ship all that money to government securities. When we blame banks for shoving all national savings into lending to the government instead of channelling it to the private sector, we are blaming the victim. The point is this: no lender will be willing to extend loans to Wanjiku if it does not have access to information about her.

If President Kenyatta is truly serious about protecting Wanjiku and SME’s, let him push the Treasury to quickly table in Parliament a consumer protection law for the financial sector. As far back as 2012, the Treasury produced a draft financial sector consumer protection law that reflected international best practice.

In South Africa, the National Credit Act protects borrowers and regulates small loans for any amounts below rand five million. That regulator has powers to set interest rate caps and to subject high standards of transparency and disclosure on loans extended to the small man.

And there is a financial sector ombudsman where borrowers can lodge complaints about usury and about those obscure conditions that lenders hide in the fine print.

If we introduce a consumer protection law for the financial sector that is in line with global best practice, there will no need to tinker with the credit information sharing framework so arbitrarily.