“Let’s not throw out the baby with the bath water”
* This blog was created by CIS Kenya. It was orginally featured and published on their website.
A number of concerns have arisen about credit information sharing (CIS). Many of these are indeed myths about credit reference bureaus. John Lenon once said, ‘’ I believe in everything until it is disproved. So I believe in fairies, the myths, dragons. It all exists, even if it’s in your mind.’’
The first myth arises from the concept called blacklisting. We have heard it from many quarters, including the petitioner who has approached Parliament asking for disbanding of CRBs on account of the blacklisting of borrowers. This is retrogressive, and as we shall demonstrate below, blacklisting of consumers does not actually exist in today’s era of full-file data sharing, meaning sharing of data on both performing and non-performing accounts.
In February 2014, all banks commenced sharing of records about all their borrowers, not just defaulters. According to Central Bank of Kenya Risk Classification Guidelines, loan facilities are classified into 5 categories: Normal (borrowers who have no arrears), Watch (arrears of up to 90 days), Substandard (arrears over 90 days), Doubtful (arrears over 180 days) and Loss (arrears over 360 days). All these accounts are shared with the credit bureau. Lenders update the credit bureau every month to reflect repayments during the last one month. After every update, many borrowers oscillate from performing to non-performing and back to performing, depending on payment of monthly instalments. No record remains permanent, unless repayments have stalled permanently. At any one time, more than 90% of records in bureaus are about performing loans. Clearly, CRBs are not custodians of any blacklist.
If more than 90% of all accounts shared with the credit bureau are performing accounts, this is further testimony of the fact that credit bureaus are not about blacklisting borrowers. This majority has not asked for disbanding of credit bureaus, because they have positive records that prove their credit-worthiness. The existence of their credit records at the bureaus gives lenders comfort when granting them credit. They enjoy faster turn-around time when they apply for credit. They benefit from the quick and automated mobile micro-lending products which are providing credit efficiently to an ever-increasing number of Kenyans. They enjoy unsecured lending.
Amongst bad debtors, there are two categories. Between 1% and 3% of total debtors consist of Serial Defaulters – professional defaulters who borrow from several lenders and default in all of them. Fortunately, serial defaulters are rare nowadays, thanks to the introduction of CRBs. In the 1980s and 1990s, they roamed freely, bringing down dozens of banks, causing immense agony to depositors. No petitioner, unless he is one himself, would want to protect serial defaulters. It is serial defaulters, not the CRBs as alleged by the petitioner, who have the potential to threaten the stability of the financial system and must be denied credit until they are made to repay loans that originate from accumulated savings of many small depositors.
But there are bad debtors (about 5%) who, due to acceptable reasons, are unable to repay their debt. Even though their information is in the CRB, lenders still grant them credit, depending on the risk appetite of the banks. This explains the growth in loans that we are witnessing in banks today. The gross loans in banks alone increased from Ksh.1.53 trillion in December 2013 to Kshs 1.88 trillion in December 2014, thanks to the fact that banks are willing to lend. This growth would never have happened if the banks’ first duty is to avoid lending to people who have defaulted in any way. They are often asked to repay their loan before being granted additional loans. Many do repay, and after obtaining clearance certificates, are granted more credit. Others are able to restructure their loans, depending on the policies of the lender.
There is nothing in the law (Central Bank of Kenya Act, Banking Act, Sacco Societies Act, CRB regulations 2013) that prohibits lenders from extending credit to people with any default history. I quote ‘Regulation 33 Sub regulation 3: Information kept in accordance with sub regulation (1) may not be used solely to affect the customer’s chances of obtaining credit but as one of the factors to inform the decision making process’. If a bank is unwilling to lend on account of poor credit history, the borrower only needs to shop around for a lender who has the risk appetite for borrowers with a default history.
Just like most solid pieces of infrastructure, the fruits of CIS take a while to reap. For Kenya, a number of benefits have already emerged. Serial defaulters are properly being identified. Digital finance is experiencing tremendous growth. Incidences of over-borrowing can now be tracked and, as a result, credit bureaus are protecting good borrowers from over-indebtedness and financial inclusion is being expedited at an unprecedented scale.
The way of getting the most of out the mechanism: Get more Data!! Data from more sources is a sure way to neutralise biases in the credit bureaus. Consistent payments of water, power and phone bills, and loans from chamas, SACCOs, microfinance institutions, etc, is a sure way of adding credibility to the system as it will give a more comprehensive view of you the borrower. Let us make this system work for all of us. Access your free credit reports once a year as entitled by law. If you have noticed an error in your credit report, contact your lender, or lodge a dispute with the credit bureau. If you are still dissatisfied, contact Tatua Center our dispute resolution center for free mediation. Let’s not throw out the baby with the bath water.