Opinion

How credit record sharing will work for you

How credit record sharing will work for you
  • A good credit record, resulting from a good repayment history, demonstrates high creditworthiness and should lead to lower cost of credit.
  • There are 378 million records in CRBs, of which 42 million are blacklisted — 13 million for under Sh1,000.
  • CRBs should generate a borrower’s credit score for lenders to use to assess creditworthiness.

On April, 8, some new regulations for credit reference bureaus and Credit Information Sharing (CIS) system came into force, refreshing the framework in place since 2013. They provide for the licensing and supervision of CRBs by the Central Bank of Kenya and a framework for the exchange of credit information between lenders and bureaus.

CIS aims at bridging the creditworthiness information gap by having credit priced according to borrowing history. A good credit record, resulting from a good repayment history, demonstrates high creditworthiness and should lead to lower cost of credit.

BLACKLISTING

It should ensure the banking sector works for and with Kenyans as per the Banking Sector Charter launched by CBK in February last year.

But the CIS has not worked as expected. For instance, it was seen as a punitive “blacklisting” tool that bars Kenyans from getting loans instead of helping borrowers take advantage of their credit history to get better-priced loans.

There are 378 million records in CRBs, of which 42 million are blacklisted — 13 million for under Sh1,000.

Customers have complained about slow updating of CRB records after a debt is cleared; delays in correcting errors by lenders who mistakenly “blacklist” compliant borrowers; and the cost of clearance reports for youth entering the job market. Unregulated digital (mobile-based) and credit-only lenders were seen as outrageous in using such measures to harass delinquent borrowers.

The improvements come on the backdrop of two important pillars to strengthen banking. Banks are now required to adopt a risk-based pricing approach that takes into account borrowers’ credit reports in the pricing of loans.

CREDIT SCORE

CRBs should generate a borrower’s credit score for lenders to use to assess creditworthiness.

These pillars will go a long way in addressing the underlying concerns. Unregulated digital lenders and credit-only outfits have been removed from the CIS mechanism. The fresh regulations improve the CIS framework for the benefit of borrowers and lenders alike. The key elements include:

First, the new regulations set a minimum of Sh1,000 for negative credit information that is submitted to CRBs by lenders. More than five million unique borrowers, more than a third of those “blacklisted” by CRBs, will be “delisted”.

Secondly, a first-time CRB clearance certificate will now be given by the bureaus at no charge. This will be particularly beneficial to our youth and graduates seeking formal employment for the first time.

Thirdly, saccos regulated by the Saccos Regulatory Authority (Sasra) will now provide and access information from CRBs, similar to commercial and microfinance banks. Saccos are major players in the financial sector and a significant number of micro, medium and small enterprises (MSMEs) borrow from them.

ECONOMIC IMPACT

Fourthly, the regulations strengthen the supervision of CRBs in accordance with global best practices. They enhance governance by requiring a diversified board composition and empowering CBK to set minimum capital limits for CRBs to be financially sound.

Importantly, sharing of negative information was suspended for six months — April 1 to September 30 — to lessen the economic impact of the Covid-19 pandemic. Loan that become non-performing during that period will not lead to a “blacklisting” of borrowers.

However, borrowers should repay their loans on schedule to build a good credit history.

Dr Njoroge is the Governor of Central Bank of Kenya. @njorogep