Lenders face penalties for not lending to borrowers with negative credit history

By JAMES ANYANZWA

Banks, microfinance institutions and savings and credit cooperatives (saccos) that refuse to lend to borrowers with negative credit histories will face financial penalties of 2 million Ksh ($16,666.66) while that the administration of President William Ruto is stepping up the war on Kenya’s credit starvation.

In addition, more than four million defaulting digital debtors will be removed from data collection agencies’ borrower blacklists starting November 1, marking the start of a major shake-up in the operations of credit reference bureaus (CRBs). ) from the country.

President Ruto, during his inauguration speech on September 13, asked the CRBs to review their operating model by moving from the blacklist of defaulting debtors to a graduated credit rating system.

The president argued that the “blacklist” has “unfairly” excluded millions of Kenyans from the formal credit system and deprived of other employment opportunities.

Banks, however, said failure to share negative information about borrowers will lead to a resurgence of bad loans and hamper the disbursement of new loans.

Need for disclosure

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The banks, through their lobby group Kenya Bankers Association (KBA), have said that full disclosure of borrower information is important to reduce the information asymmetry between banks and borrowers, which is essential in the credit assessment process.

“While the impact of financial service providers being blocked from sharing negative information will not be immediate, its effects will undoubtedly limit the issuance of new credit,” said Habil Olaka, KBA’s chief executive.

“Banks granting credit without complete information on the risk to customers increase their non-performing loans, which has adverse effects on their soundness and stability,” he added.

President Ruto’s efforts for policy change in CRB operations are underpinned by the Banking (CRB Regulations) 2020.

The regulations provide that each credit bureau must develop a credit score for each borrower whose credit information has been submitted and that the credit score must be calculated using the details and method prescribed by the Central Bank of Kenya.

According to the regulations, credit reports must not be used by financial institutions to deny loans to customers, but must inform the decision-making process when determining a credit application.

“An institution that denies a customer a credit facility or any other financial service solely on the basis of a credit score shall be liable to a fine of Ksh 2 million ($16,666.66) or other penalty under the law, the Microfinance Act 2006 or the Sacco Societies Act 2008, as the Central Bank may impose,” the regulations state.

“Every institution must consider a customer’s credit score when evaluating a customer’s credit application and in pricing a credit facility.”

CRBs are required to keep credit ratings in their possession for at least five years.

Campaign promises

President Ruto, keen on keeping his campaign promises, last week ordered the CRBs to stop “criminalising” borrowers who fail to meet their loan obligations, but instead give them a chance to manage their debts.

“I am happy that the Governor (Central Bank Governor Patrick Njoroge) told me that they have commitments with the CRBs so that we can change the mechanism of credit listing for, instead of blacklisting , we can have a graduated mechanism that assigns scores to each borrowing citizen of how they borrowed and how they repaid. This is a universal principle for evaluating people for credit.

“This development is a very positive development for the millions of people who are experiencing great loss; they are excluded from formal borrowing, and they are also excluded from many other things,” President Ruto said.

“Governor, please explain to our good friends in the CRB space that we are not against CRBs, no. Our position is that we should change the registration model so that it is not all-or-nothing and does not criminalize; we do not unfairly disadvantage borrowers, but we give them the opportunity to be rated so that we have a graduated system that can help all Kenyans.

He spoke at an event which saw Safaricom and its partner banks (KCB and NCBA) announce a 50% tariff reduction on its emergency and short-term overdraft service dubbed “Fuliza”.

The facility launched in 2019 allows Safaricom’s M-Pesa customers to transact even when they do not have sufficient funds in their accounts.

The banks also announced that four to five million defaulting Fulizas will be deregistered from the CRBs as of November 1.

“For the past few months, Fuliza has been a very popular word in our campaign, and I’m glad you’re listening,” Dr Ruto said.

Kenya introduced borrower credit information sharing in 2009 to help control the growing volume of bad debts.

This followed the Banks (Credit Reference Bureau) Regulations 2008 which became operational on 2 February 2009.

Measure the risk

“Virtually all banks use credit scores – to varying degrees – to effectively assess customer creditworthiness and appropriate prices to charge on loan applications,” KBA said.

“Without credit scores, banks use any other information (which varies from bank to bank) to determine what customers are eligible for and what interest rates to charge alongside their other internal credit policies. In in extreme cases where information is lacking, banks may resort to loan refusals.

The CRB Regulations (2020) also removed the CRB clearance certificate fee for new applicants and set the minimum volume of non-performing loans that can be listed with the CRB at Ksh 1,000 ($8.33)

The offices charge around Ksh 2,000 ($16.66) per clearance certificate, a source of revenue that was severely compromised after the directive.

The National Treasury, through its National Credit Information Sharing Policy dated September 2019, has stated that banks are not supportive of the use of credit information, which is likely to close another source of income for CRB operators.

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