The noose is set to tighten on bank loan defaulters with a proposed law that gives saccos direct access to credit repayment records of all borrowers having been tabled for debate in Parliament.
The Bill allows savings and credit cooperative societies (saccos) direct access to information about good and bad borrowers, effectively enabling them to weed out those who turn to them for loans after defaulting on their bank debts.
“Sacco societies may, in the ordinary course of business and in such manner and to such extent as may be prescribed under the Banking Act, exchange such information on performing and non-performing loans as may be specified by the Authority from time to time,” says the Sacco Societies (Amendment) Bill, 2016.
Saccos have until now been sharing names of loan defaulters with credit reference bureaus (CRBs), but they have not had access to the records of bad borrowers since the law allowed only banks to view the information.
Saccos are hugely popular with borrowers due to their relatively cheaper and fixed lending rates.
There are 184 licensed saccos in the country with deposits worth Sh205 billion and a total loan book of Sh228 billion.
Non-performing loans held by the saccos add up to an estimated Sh15 billion, indicating the bulk of borrowers have good records.
Bad loans in the banking sector are, however, at a decade-high Sh170 billion, indicating that the defaulters could be shifting to the sacco sector.
The sharing of positive information by saccos will further put pressure on lending institutions to reward good borrowers instead of using CRB reports to merely blacklist defaulters.
Lending institutions have been rejecting loan applications by borrowers listed with the credit bureaus for having defaulted on previous loans.
Borrowers have been forced to clear outstanding amounts with the previous lenders and then wait for up to one month before getting a new loan.
“The Act forming credit bureaus had omitted saccos – so this is bringing them on board so you don’t get a loan from the bank, default and then come to us,” said Sacco Societies Regulatory Authority (Sasra) acting chief executive John Mwaka.
Banks have also been accused of listing customers who had outstanding transactional fees such as debit card application fees, turning the credit bureaus to fee collecting agencies to drive their profitability.
The Bill also seeks to tighten corporate governance in saccos by introducing a requirement for the vetting of directors in an effort to boost confidence in the sector.
Sacco directors have oversight on the credit unions, which gives them more privileged access to loans by the lenders. Some directors have abused their positions to advance themselves credit irregularly or default on their obligations.
Conduct proper test
The Bill requires Sasra to conduct a ‘‘fit and proper’’ test on directors of licensed saccos to enhance corporate governance in a sector billed as an alternative to banks.
Sacco directors who might have defaulted on their bank loans are likely to be pushed out of their executive positions, with the authority proposing checks on their financial status or solvency.
Sasra also seeks to lock out persons who have held a director position in a sacco that collapsed from serving in management or on the board of any other credit union.
The proposed law seeks to cement Sasra’s authority in the financial sector by repealing a section in the Act which gave saccos powers to appeal the regulator’s decision with the minister in charge of co-operatives.
Controversy on the purchase of Equatorial Commercial Bank-- now Spire Bank-- by Mwalimu Sacco brought to the fore concerns on who had the final say in the sacco sector.
“There are so many other dispute resolution mechanisms so saccos will have other channels to appeal,” said Mr Mwaka.
The sharing of information between banks and saccos is likely to boost positive ratings of good borrowers due to the frequent use of co-operatives which offer cheaper loans on more friendly terms.
Saccos will, however, have to invest in robust data management and storage systems to ensure they are able to send out detailed reports as required by the bureaus.
The sharing of customer borrowing information was introduced in the country in 2010 as the government sought to root out serial defaulters from the system.
High loan default rates were cited as a major contributor to high interest rates by banks who had to factor the probability of default in the pricing.
Inquiring from the bureaus has become a major requirement in loan appraisal process for most banks.
Central Bank of Kenya data shows that 12,546,983 reports have been requested by banks since the introduction of information sharing in 2010.
Bank customers, who are entitled to one free credit report each year, have made 177,450 requests, indicating they do not put as much emphasis on information sharing as the banks do.
Appraisal of borrowers
The issuing of loans through mobile phones has increased the use of credit information in the appraisal of borrowers’ ability to repay a loan.
But the introduction of credit bureaus six years ago has not borne much fruit in lowering interest rates, resulting in the ongoing debate on regulation of loan prices.
Parliament two weeks ago passed a Bill capping bank interest rates at four per cent above the indicative Central Bank Rate (CBR), pushing the decision to President Kenyatta who must sign it before it can become law.
If Mr Kenyatta immediately signs the Bill into law, bank lending rates would be capped at 14.5 per cent, based on the current CBR of 10.5 per cent.