Why new CRB listing rule signals costly digital loans

The new Central Bank of Kenya rule that inhibits credit reference bureau (CRB) listing for loan defaulters before six months, and which also aligns mobile loans to normal loans is set to hit Kenyans badly as the three months’ notice given to the financial institutions to start complying to the rule elapses.

But why? On the face of it the rule sounds a good one, I mean-I will now take a loan and stay with it for as long as six months without anybody, not even the bank asking me a thing; and moreover, I will now have a whole 180 days to repay a mobile loan, which the inconsiderate, moneymaking banks do press me to settle within 30 days. Buddy, if this is not a good deal, then I don’t know what is.

Hold on and take a breathe. In actual sense, the populist move, which is aimed at checking the large number of people listed negatively with the CRB, may cost borrowers.

The rule exerts pressure on lenders, which are likely to, in turn, react to minimise the possible risks that may come along with. It should be remembered for instance, that in 2018 when Central Bank Rate (CBR) lowered to 9 percent and with the interest rate cap law in effect, which puts a ceiling on lending rate by banks and other financial institutions to at most four percent above the central bank of Kenya base rate, lenders reacted by increasing commissions and fees, introduced new charges such as loan insurance on overdrafts and stepped up investments in government securities to minimise the effect of the lowered CBR.

Mr Paul Mburu, a senior manager at a leading microfinance bank supposes “If mobile loans are aligned to normal loans then the loser will be the borrower.” He explains, “banks may shy away from mobile loans because digital borrowers may end up borrowing from multiple lenders and refuse to repay and after six months, they’ll be listed to have non-performing loans from many banks. Listing mobile loan defaulters after six months implies that the repayment period of digital loans is extended to six months and I honestly don’t see banks doing this. In fact they may scrape off mobile loans.”

If banks choose to follow this route, then digital borrowers will have no alternative but to turn to more expensive digital lenders who operate out of the ambit of the CBK. In the wake of the high demand and high risk involved, the already expensive lenders are likely to increase their interest rates because they are not regulated after all.

Eyebrows have already been raised by the revelation that about 17 percent of digital borrowers take one loan to repay another. If borrowers are left at the mercy of these unregulated lenders, they will be overstretched economically, thus impoverished.

Alternatively, lenders may restructure mobile loans to align them with the new rule and to accommodate the risks involved. The reconstruction may take the form of Kenya Commercial Bank (KCB) mobile loans where anybody who had ever been negatively listed with the CRB is automatically disqualified from accessing the digital loans. The measures that are likely to be taken by the lenders may make it as difficult to access mobile loans as it is for normal loans.

The new template that CBK has reportedly circulated to the banks may not, after all, save defaulters. The only thing it may achieve is to increase the number of days that a loan in default may be listed as non-performing, but it won’t prevent the credit bureaus from showing that, in deed, a loan is in default.

From the onset, it is evident that whenever the regulator adjusts, Kenyan banks readjust. Lenders may lay more brutal risk and compliance measures to react to the new rule that appears to bend towards defaulters. For instance, banks may decide to freeze unsecured loan products such as the salary check offs. This may lock out a sizeable population from accessing this kind of cheap and quick loans.

They may also be more thorough during loan appraisal so that a borrower would be asked to produce document after document before a loan is approved making the whole process cumbersome and frustrating.

Any minor indication that the character of the borrower is questionable or that the borrower would have difficulties in facilitating the loan would be enough grounds for banks to decline a loan application however strong the ability of the borrower is. In a sense the creditors will need to prove beyond any reasonable doubts that the risk is at the lowest low. There shall be no rooms for the benefits of the doubts.

Now, the question is: By issuing and implementing the new CRB listing rules, will the CBK achieve their aim of reducing the number of defaulters listed with the CRB? Yes, they will, by reducing the number of borrowers, because the new rule shall make it too difficult to access a loan; and if you can’t access a loan, you can’t default. It’s that simple.