Requests by banks for loan repayment reports from credit reference bureaus (CRBs) jumped nearly three-fold to 12.40 million in the race to shield lenders from defaults, especially on short-term mobile phone-based credit.
Central Bank of Kenya (CBK) data shows that requests for loan reports from the CRBs rose by 181.1 percent last year—marking the fastest jump since the introduction of the bureaus in 2010.
The increased use of the reports is linked to the sharp rise in supply of "soft" loans given through mobile phone platforms.
The rising appetite for digital loans has led tens of unregulated microlenders to invade Kenya’s credit market in response to an increase in demand for quick loans and the freeze in commercial bank lending to individuals and small businesses that followed the 2016 capping of interest rates.
Banks have followed suit and the ease of digital borrowing has created an ever-growing pool of distressed borrowers.
“The launch of various technology-based credit products by both banks and other credit providers, including FinTechs, boosted the number of credit reports, as the institutions sought to understand the credit histories of customers on the technology-enabled platforms, prior to disbursement,” CBK says in the Bank Supervision Annual Report 2018.
“The increased requests for credit reports by banks were attributed to the growing acceptance by lenders to adopt the usage of credit information in the assessment of borrowers’ creditworthiness.”
Interest on mobile loans were not capped under the previous legal regime that imposed a ceiling on credit rate charges in 2016, setting the ground for banks to lend aggressively via mobile phones.
KCB (KCB M-Pesa), Commercial Bank of Africa (M-Shwari), Equity (Equitel), Co-operative (MCo-op Cash) and Barclays (Timiza) are some of tier-one commercial lenders that have increased sale of low-value instant mobile loans.
Such credit facilities largely mature in a month, resulting in repeat borrowing in a year.
Borrowing on the mobile loan apps powered by the banks, which are easily accessible through smartphones, costs between two and eight percent in facilitation fees and other charges such as taxes, equating to more than 80 percent interest when computed annually.
This has coincided with a rise in defaults on loans taken through mobile phone platforms, prompting a rise in the number of defaulters reported to the CRBs, hurting the borrowers’ chances of being able to borrow more.
Prior to 2018, credit reports requested by the industry’s 40 banks and 13 microfinanciers had fallen to 4.38 million in 2017 from 4.94 million the year before and 5.97 million in 2015.
Sam Omukoko, managing director for Metropol CRB, said there was a significant uptick in use of mobile loans apps by the banks and FinTechs in 2018, citing institutions registered with CRBs. “There was a lot of lending happening on FinTech platforms and banks went into mobile lending. Most of it (growth in credit reports) was happening on mobile platforms. If you go to traditional loans, probably there would a decline in credit reports purchased,” Mr Omukoko said.
“The tenure of mobile loans is very short (mostly a month) and so you have repeat customers unlike traditional lending, which will lock you in for 24 months or more.”
The 12.4 million reports requested by banks is a stark contrast to lowly 149,558 reports accessed by individual borrowers in 2018, 13.66 percent climb over 131,587 reports a year earlier.
The CBK attributes the rise in individual customer credit history requests to increased general public awareness with some employers demanding clearance certificates. Borrowers are entitled to a free report every year.
“Because banks are only using the reports for declining or accepting loans, individual involvement is very low. In fact, individuals only get involved when loan applications are declined,” Mr Omukoko said. “Banks usually refer borrowers to the bureau when they decline their requests for loans.”