How credit scores will benefit borrowers after rate cap era

Kenya’s credit information sharing mechanism came into force in February 2014 following publication of Credit Reference Bureau (CRB) Regulations 2013.

The idea was to assess and score borrowers according to their credit history and help those with clean records to negotiate for better loan terms.

For many retail borrowers and the SMEs, this promise never materialised as banks continued to charge them exorbitant interest — at one point as high as 28 per cent — prompting Parliament to pass a September 2016 law capping loan charges at four percentage points above the benchmark Central Bank Rate (CRB).

That move in turn saw banks stop offering unsecured loans to households and the SMEs, culminating in the ongoing efforts to repeal the law. Now that efforts to repeal the law are underway, credit scoring is expected to resume its critical role in the loans market.

Metropol Corporation, the largest credit reference bureau with a market share of about 60 per cent (27.7 million credit accounts in its database), believes it has a solution that could finally strengthen the borrowers’ bargaining position and enable them negotiate better loan terms in the post-rate cap era.

The company has built a customer-centric credit information system, dubbed Borrow Money, which enables retail borrowers with a clean credit history to walk into a bank with their credit scores and negotiate better loan terms. Managing director Sam Omukoko spoke to the Business Daily about the platform.

WHAT DIFFERENCE IS THIS NEW SYSTEM GOING TO MAKE IN THE CREDIT MARKET?

What we are offering is sort of a wall where borrowers with a good credit score can post their applications for a loan and get to meet lenders looking for clients. The ‘Borrow Money’ platform is intended to be a place where borrowers can test their attractiveness to the lenders. There are those lenders who will accept only borrowers with certain scores for particular loans.

READ: Borrowers get credit score to negotiate cost of loans

The system is programmed in such a way that it will automatically direct information on such borrowers to those lenders. Besides, the system educates the customer about their score and how the information is being used to assess their creditworthiness.

HOW WILL THIS CHANGE THE WAY BANKS PRICE LOANS?

This is a paradigm shift. Instead of customers crying that banks are overcharging, it puts the power of choice in the hands of the borrower. The fact is that when all of us go to banks carrying our credit scores and demand that it be considered when pricing our loans, they certainly can’t ignore us.

Will information on this platform be accessible to potential borrowers, including ‘Mama Mboga’ who borrows via the mobile phone?

Yes. Access to the information is via the mobile phone. The system is actually up and running. Besides, we have opened regional offices in Machakos for Lower Eastern, Meru for Upper Eastern, Nyeri for Central, Nakuru for Central and South Rift, Eldoret for North Rift, Kisumu for Nyanza, Kakamega for Western and Mombasa for Coast. We have nearly 350 agents countrywide who are serving customers in remote areas.

WHY RUN REGIONAL OFFICES WHEN THE SYSTEM IS DIGITAL?

We have come up with a concept we are calling ‘credit communities’ that are made up of people who live within a particular locality and do business with each other. The goal is to collect and make available information that is tailored to that particular area to, for instance, enable bank branches deal better with people within a locality. As we empower the customer through knowledge of credit score, we are also empowering the creditor to share data in exchange for access to customer profiles within that trading community. That way, we can remove a serial defaulter from a community.

Just to be sure again. Could you explain how this platform will empower the retail borrower?

For the lenders, a good score means low risk of default and, therefore, a good customer. All borrowers with a good credit score should negotiate better credit terms with the lenders.

What may be happening in the market today is that a lender may have a borrower’s good credit score but because the customer does not know they are charged interest that are as high as for those with not-so good credit scores.

Ordinarily, credit capital is used as a means of building (borrower-lender) relationships. A borrower with a good credit score is of low risk to the lender and should engage the lender for more favourable loan terms.

MOBILE LOANS HAVE EMPOWERED BORROWERS LOOKING FOR LOW-VALUE EMERGENCY LOANS, BUT DEFAULTS IN THERE ARE ON THE RISE.

Initially, this was a very exciting thing. Even people who had not borrowed before went to the mobile platforms to borrow. The ignorant ones thought ‘I have just borrowed on phone, the lenders don’t even know where I am’.

Some people take money and throw away the phone. We have a category of customers who went into this simply to take advantage of a service that had become available. The bulk of those borrowers constitute the defaulters of mobile loans.

It is, however, important to note that although the number of mobile loan defaulters looks high, the loans were small and people who have been able to access credit in that environment are even more.

In the mobile system, the average default rate is three per cent (of the value) despite the numbers (of defaulters) compared to the formal banking system where you are dealing with a small population, but default is about 13-14 per cent (of total loans).

HOW HARD IS it FOR ONE TO CLEAR HIS NAME FROM CRB BLACKLIST?

All it needs is paying off the loan. But we have seen lenders bring charges even after one has cleared. What we do is to check around all manner of things associated with an individual’s accounts before giving them a certificate of clearance.

One, however, does not have to go to the lender to show they have been cleared because the lender has access to the information. There’s a one-off cost of Sh2,200 for the certificate.

BUT WHAT IS THE JUSTIFICATION OF PAYING SH2,200 TO CLEAR YOUR NAME FOR DEFAULTING A SH300 MOBILE LOAN, FOR EXAMPLE?

The actual cost of credit for somebody who’s consistently borrowing and paying is minimal. The guys who get problems are those who default. We sympathise with those who default for reasons not of their making, but there are those who just default for no reason.

When restoring credibility one must know it is not good to borrow and default. If you default you have to go through a process to bring yourself back to a position where you can start borrowing again. But (getting a clearance certificate) only happens when the lender insists it must be done.

BUT THERE ARE ALSO CASES OF BEING ERRONEOUSLY BLACKLISTED?

That happens. Sometimes, lenders tend to mix up names. For us, we are strict on identification numbers because we don’t use names. If there’s a mix-up in the IDs, that will seriously be an IT issue because even the loading of data is done automatically. It is good for a borrower to keep on checking status because the law allows one a free report annually.