Kenyan commercial banks are tilting usage of credit background information on borrowers in an attempt to categorise loans according to risk, rather than impose blanket denials on defaulters.
And the new policy announced by 23 Kenyan lenders, with affiliates in the region, could adjust the perception against credit reference bureaus (CRBs), the traditional custodians of background information on borrowers, but who often charge hefty fines to give certification on risks.
The decision to use a pricing model to determine the worthiness of credit is a shift away from negative listings of defaulters to a new system of credit score rating that does not deny borrowers credit on the strength of their credit bureau reference scores.
It may benefit everyone, but mostly ensure survivability of the CRBs themselves who have lately been in the eye of storm for negatively listing people, including billionaires, who are then denied loans from banks. The new model will still allow CRBs to charge their fees, but their negative listing will provide a lower score that implies higher risk, and hence, higher interest on repayments for loans borrowed, rather than outright rejection.
It means credit score will now be determined through a number of factors including whether you pay your bills on time, every time, keeping your credit card balance well below the limit, and paying off your debts as quickly as possible among other factors.
The shift is in line with last month President William Ruto’s directive to the Central Bank of Kenya to abolish the blacklisting of borrowers and instead have a scoring method where defaulters will get a low grade instead of being shut out of the financial system.
The CBK is concerned about the continued use of adverse credit reports issued by credit reference bureaus (CRBs) which are viewed as being used to deny borrowers credit. This is despite the recent improvements in the Credit Information Sharing (CIS) framework.
“The CBK remains concerned about this perception and is taking concrete actions to address it and strengthen the CIS framework,” a statement by CBK said.
Working on two fronts
Accordingly, CBK has been working on two fronts: First, CBK has mandated all CRBs to include a standard statement at the top of every credit report indicating that a customer’s credit score should not be used as the sole reason by a lender to deny a customer a loan.
Further, CBK is working with CRBs to improve the quality of the credit reports, and in particular, enhance the robustness of their credit scoring models and align them to best practices.
“Second, the CBK is working closely with banks in implementation of risk-based credit pricing,” read the statement.
“In this context, banks are required to consider the credit score of a borrower in addition to other factors in making a lending decision. This approach would allow borrowers and especially micro, small, and medium-sized enterprises to access appropriately-priced credit.”
Data from the country’s three CRBs showed that borrowers who had defaulted on digital loans of less than Ksh1, 000 made up the bulk of 4.6 million borrowers blacklisted at the time.
“Many of the commercial banks are having their models reviewed. So far we have at least 23 banks whose models have been approved (by the CBK),” said Habil Olaka, CEO of the Kenya Bankers Association.
“Each bank will of course have its unique model having the same principles but having a unique model in its own way because of its own portfolio.”
More than four million loan defaulters were to be removed from CRB blacklists under plans mooted by President Ruto to reform the country’s credit market.
This follows the end of the year-long suspension of negative listing of defaulters of up to Ksh5 million by the administration of former President Uhuru Kenyatta, whose relief period for such defaulters ended on September 30.
Negative information only
Lenders say the directive suspending reporting of defaults on loans had hampered the rollout of the differentiated lending framework on mass market loans due to the inability to use the credit reporting system.
“The so-called CB listing should never have happened. When the CRB began, banks were mandated to provide negative information. It was the law when CRB was introduced as it mandated banks to show negative information only. Positive information you had to get the consent of the client for you to disclose it,” Olaka explained.
“Only ‘negative’ people were having their data there; most information was kept out. So, people grew up knowing you should avoid going there. It is unfortunate that the way it was introduced created those problems but now what we have to do is to correct them. But with the new regulations, this is now going to be a thing of the past,” said Olaka.
“How the framework should be developed is such that I should be proud of my name going there because I can use that information to get better terms and better access to credit and all that.”
The use of credit scores by potential lenders and creditors, such as banks, credit card companies or car dealerships, as one factor when deciding whether to offer you a loan or credit card is welcome to players in the market as it will help demystify the idea of “CRB listing”.
“Everybody should get credit; it is just the question of the risk on return, where the higher the risk, the higher the cost of credit and the market already shows us. But by adopting the price risk model, it is one factor among many to help them (banks) determine how likely you are to pay back money they lend,” said Ndiritu Muriithi, an economist and former Governor for Laikipia County.
“The risk pricing model will assist lenders to make credit assessment quickly. It is a tool whose end is to be able to assess the credit worthiness and to be able to price the risk.”
Muriithi said CRBs were created to make it easier for financiers to lend to borrowers especially in the SMEs sector and should not be used to deny borrowers credit/loans saying the current debate points to a misunderstanding and misuse of credit scores.
Last month President Ruto directed the CBK to abolish the blacklisting of borrowers and instead have a scoring method where defaulters get a low grade instead of being shut out of the financial system. The president said the aim is to shift away from negative listings of defaulters to a new system of credit score rating that does not deny borrowers credit.
“CBK urges the public to honour their payment obligations on their credit facilities when they fall due. This will enable them to build a good credit history based on their payment behaviour and thereby obtain loans at better rates,” said CBK in a statement dated October 10.
“When borrowers experience challenges in repaying their loans, they should proactively engage their lenders directly.”