Stats show that more than 2.7 million Kenyans are listed on various Credit Reference Bureaus (CRB) for either failing to pay their loans on time or for completely defaulting to pay.
The saddest thing is that 500,000 of the 2.7 million Kenyans have been listed for failing to pay less than 200 shillings, most of which were taken from mobile loan lenders.
It is because of what was described as “reckless” blacklisting of borrowers that the Central Bank of Kenya (CBK) issued new guidelines that are meant to reduce risks for lenders as well as make it easier for customers to access credit.
Some of the new requirements include:
- Making daily submissions of customer information to Credit Reference Bureaus (CRBs)
- Introduction of standard validation checks to standardize the analysis of data by CRBs and enhance data acceptance rates
- The classification of Non-Performing Loans indicator field to prudential risk classification which is meant to enhance loan classification is done as per CBK Prudential Guidelines.
Read:
- Banks to Submit Names of Key Shareholders to CRBs to Boost Credibility
- 500,000 Kenyans Listed on CRB Owe Less Than 200 Shillings
- No Listing on CRB for Loan Defaulters before 6 Months
Daily submissions will enable financial institutions, fintechs, and users to make quick lending decisions. This will, in turn, play an instrumental role in expanding access to credit and other services especially to the unbanked.
Increased access to digital lending solutions. Many lenders will embrace digital lending as a result of increased data on clients. This will improve access to credit due to reduced bureaucracy and costs associated with manual processing.
Daily submissions will also enhance individual customers’ creditworthiness since additional data categories may include information that lenders expect to be taken into consideration in advancing credit.
The submissions are set to reduce business risks, especially to financial institutions because of the improved credit analysis through information sharing. When comprehensive credit information is shared on reliable infrastructures, the cost of financial intermediation falls thus making financial products more accessible to a vast population. In addition, lenders and investors will have greater confidence in their ability to evaluate and price risk.
Lenders will be able to get real-time data through daily submissions that will further enhance risk-based pricing through new tools and automation. Consequently, stakeholders will be able to price risk appropriately and provide customized products and services to meet their specific needs.
It will also help identify “Serial defaulters”, who borrow from various banks with no intention of repaying. Undoubtedly these defaulters thrive in the “information asymmetry” environment that is prevailing due to lack of a credit information-sharing mechanism. This really calls for the Daily data submission to the bureaus such that defaulters are continuously blacklisted.
Effects of the introduction of standard validation checks to standardize the analysis of data by CRBs and enhance data acceptance rates
Interpretation of data: This will harmonize CRBs data interpretation across the CRBs. This means that all the CRBs will have similar/uniform CRB Reports, unlike the existing template where reports generated from CRBs have different parameters/characteristics.
Uniformity of data analysis results: The harmonized data reports will lead to uniform data analysis results across the CRB companies. This will reduce customers’ complaints. Previously CRBs gave different data analysis results making it difficult for financial institutions to interpret and determine the outcomes.
Reliability of CRB data: The standardized analysis of data will enable borrowers to get a fair credit analysis for the facilities sought irrespective of the bureau from which the report is generated. With good and realistic credit analysis good borrowers will be able to access credits at better rates from financial institutions.
Enhancement of data security. Data from CRBs are susceptible to modification, replacement or reordering. Standard validation helps to prevent and detect such intrusion by unauthorized persons or systems. This will lead to the superiority of CRB data in determining creditworthiness. Standard validation will, therefore, increase the value of the information leading to the development and enhancement of credit reporting infrastructure that positively impacts crucial decisions.
It will address the fundamental problem of asymmetric information between borrowers and lenders which has led to adverse selection and credit rationing. Regulators and financial market participants will therefore increasingly recognize the value of standardized credit reporting systems in improving credit risk evaluation and portfolio management. The result will be the enhancement of financial supervision and financial sector stability as a tool in promoting access to credit.
This information has been provided by ABC Bank Credit Risk & Legal Department