A credit bureau Thursday introduced a loan-scoring method to help lenders tag high-risk borrowers and make swift decisions on applications.
The Metropol Credit Reference Bureau scoring will expand the tools lenders rely on when issuing credit, coming in the wake of the launch of two measures by the regulator and banks.
The scoring is on the scale of one to nine, with “nine” showing a default status and “one” showing high creditworthiness.
As a result, individuals or entities with low probability of default – as indicated in the score – would get bank or other credit at more favourable rates than that with higher probability.
Central Bank of Kenya (CBK) governor Njuguna Ndung’u said that the scoring would reduce risks associated with offering credit to people on whom a bank has limited information.
“The contribution by Metropol’s credit scoring is to help customers to know their risk profile and how their loans will be priced, but also to empower them with tools to negotiate for better rates,” said Prof Ndung’u.
Kenya Bankers Association chief executive Habil Olaka said that various measures had been taken to increase transparency in the lending rates that would spark competition in the industry and enable those with good credit scores to negotiate easily.
Interest rates, Mr Olaka said, would, however, continue to be affected by inflation, government borrowing and the value of the shilling.
With the stability realised in the market in recent times, the KBA chief executive said, the average lending rates had fallen to 15.6 per cent in May compared to 17.43 per cent in January.
Mr Olaka said that reforms being undertaken in the Lands and the companies’ registry would further reduce the skewed information access that hinders credit growth.
The planned electronic assets register and expansion of credit information to include data from the mobile phone operators would also improve the credit scoring, he said.
Prof Ndung’u noted the reforms were being driven by various arms of the government, including the Treasury and the Central Bank.
“These reforms will have an overarching objective of reducing the cost of doing business,” he said.
The governor said that the market was plagued by adverse selection, meaning there was a possibility of giving credit to people who have low chances of repayment.
It was also faced with moral hazards whereby borrowers may have low chances of repaying if they have insurance or have pledged no collateral.
Bankers recently launched the Annual Percentage Rate to make full disclosure of rates charged while CBK introduced the periodical lending rate benchmark called Kenya Banks Reference Rate.