Condemned without a hearing: Borrowers take issue with credit-rating system

For Johnson* Ochieng, the start of this year ushered in one of the saddest moments in his 42 years.

Mr Ochieng, a car dealer and brand management consultant, lost his only sister to liver cancer. This was after he was unable to raise the Sh2.7 million needed for a transplant in a hospital in India.

All along, he had thought he was in total control of the situation and would find the money. He had three pick-ups worth about Sh4 million at the port of Mombasa just awaiting payment of import duty. He already had paying clients for the vehicles.

Ochieng expected to clear the import duty fee plus clear a few other medical costs with a loan of Sh670,000, which he had applied for from a commercial bank.

It was not the first time he was applying for credit, and he was sure he had crossed all the Ts and dotted all the Is in his application form. As far as he was concerned, the money was as good as in his personal account.

He walked to the bank to follow up on the status of his loan with a confident strut. He did not occupy his mind with thoughts of impressing a bank official — he did not need to. Instead, he pictured his sister going through a successful operation after he received the payment from his clients and forwarded the cash to India.

After a short wait, he sank into a seat opposite a bank officer and waited for the good news.

There is a small problem, the man began after accessing Ochieng’s details and pausing for a while.

Ochieng fidgeted nervously.

After another pause, he was informed he had some non-performing loans, and had been listed with a credit reference bureau (CRB) in 2012.

He had two non-performing accounts at a different bank, he was told. One of them had an overdraft of Sh5,344.75, the other of Sh2,300. He needed to clear this first before the bank could advance him a loan.

Ochieng felt the weight of his well-crafted plan tumbling like a house of cards. He had been profiled as a bad debtor over less than Sh8,000.

Worse still, he did not remember taking a loan or even having an overdraft facility with the bank that had listed him.

Moreover, the account with a non-performing loan of Sh5,344 did not even belong to him. Ochieng insists the bank did not notify him of its intention to blacklist him.

The delays over sorting this out meant that by the time he was able to release his vehicles from the port, it was too late for his sister.

Serial defaulters

Ochieng is just one among thousands of Kenyans whose lives have been affected by hiccups in the country’s new credit-rating system.

Initially, the objective of the information-sharing regime was to bring about some level of sanity and accountability in a financial sector suffering from a high number of non-performing loans.

But while the process may have helped lenders, it appears to have tormented several borrowers.

There is no doubt the financial industry needed CRBs; it had begun to be overrun by serial defaulters who would borrow from one institution and take up a loan from another one before settling their debts with the first lender.

Ann*, a dealer in second-hand clothes, for instance, has two non-performing loans: Sh30,000 from a microfinance institution and Sh300 from M-Shwari.

“Both of them have sent me messages, warning of dire consequences if I do not repay. I don’t care. I do not think I will ever need another loan in my life anyway,” she said.

According to the Central Bank of Kenya (CBK), serial defaulters thrived in the “information asymmetry” environment that prevailed due to the lack of a credit information-sharing mechanism.

The industry regulator notes that defaults had become so serious as to lead to the collapse of some banks in the 1980s and 1990s.

In 2008, the Banking (Credit Reference Bureau) Regulations were put in place. The Act, which became operational in 2009, governs licensing, operation and supervision of CRBs by CBK to bring about sustainable information sharing.

These bureaus — CBK has licensed three of them — “complement the central role played by banks and other financial institutions in extending financial services within an economy”, the industry regulator notes.

They also help lenders make faster and more accurate credit decisions by collecting, managing and disseminating customer information to lenders within a regulatory framework.

Further, the new regime is also supposed to help borrowers negotiate for better terms on loans — including lower interest rates — based on a positive credit history.

But concerns are now arising that lenders may have perhaps employed the system with too much zeal, and not enough attention to detail.

Habil Olaka, the CEO of the Kenya Bankers Association, however, said banks follow a laid-down procedure before listing a person’s credit rating with any of the three CRBs.

The person’s credit history is shared first with CBK, with the information showing both performing and non-performing credits, and then forwarded to a CRB, he said.

And if one feels wronged, there are dispute resolution mechanisms.

“The client contacts the CRB asking to be delisted. The CRB in turn calls the bank about the client’s query,” Mr Olaka said, explaining that if the bank insists that a customer should be blacklisted, then the issue is escalated to Credit Information Sharing (CIS) for resolution.

During the resolution process, records will show there is a dispute over the amount listed.

A CRB official, who asked not to be named as he is not authorised to speak to the press, added that if one is erroneously listed, no record of this will be kept.

However, if evidence supports blacklisting, a record of this against one’s name will show for five years after the date one clears the debt.

In January, 2014, Financial Sector Deepening (FSD) Kenya said that Commercial Bank of Africa (CBA), which runs the M-Shwari portfolio, forwarded the names of about 140,000 people to CRBs over defaults.

One such customer was Eunice*, a widow and mother of three. She makes her living hawking fruits and vegetables in the slums of Mukuru Kayaba where she lives.

For her, a loan of Sh500 was enough to get a business running. She borrowed the money from M-Shwari, but has yet to pay it back.

Eunice is semi-literate, and did not appreciate the many warning messages she got from M-Shwari. She also did not read the terms and conditions before applying for a loan from the lender, or understand that failure to repay would lead to her being blacklisted.

Ledger fees

She innocently walked to another lender looking for a loan of Sh5,000.

“They wanted to arrest me,” Eunice told Business Beat, adding that she was surprised when she was informed she could not get another loan until she repaid the M-Shwari one.

“If I had known this would happen, I would have been more serious about paying back the money I got.”

And while ignorance is no defence, perhaps the CRBs and CBK should do more to educate borrowers. One CRB mandate, according to the Act, is “public sensitisation”.

But Ochieng was not ignorant and said he knew very well the consequences of not paying his debts.

When he confronted the bank about the blacklisting, he was told that an account that he had stopped using had accumulated ledger fees. These fees and costs of honouring a cheque written on August 6, 2009, had seen him forwarded to the CRBs.

To move things along, Ochieng offered to clear the Sh7,644.75 he was listed as owing, but his bank then told him he owed Sh37,829, nearly five times more than was registered.

Because he desperately needed the loan, he agreed to pay the cash and then sought clearance from the bank. However, he was told he needed to pay another Sh43,996.

“At this point, I asked myself how this came to be,” he said.

It turned out that around 2007, Ochieng had signed up for an account that carried with it such perks as extended banking hours, free ATM withdrawals and a courtesy cup of tea. The ledger fee for this account was Sh750 a month.

But at some point, Ochieng needed to leave the country and decided to write a letter stating his intention to close the account.

“The mistake I made is that I wrote a letter and gave it to a friend of mine who was a banker,” he recalled. He said that procedurally, he was supposed to receive an acceptance letter.

In the course of going through his credit history with the bank, he saw the ledger fees had gone up to Sh1,500.

“They told me that they had upgraded the account around 2010, but they did not send me a letter,” he insisted.

The bank also said it honoured a cheque he had written for Sh22,000, even though he had no money in the account. Ochieng said he did not have an overdraft facility with the institution, so the payment should not have gone through. He added that he does not recall writing the cheque.

“Even when blacklisting me, they could have sent a message to my email, postal address or even my phone, but they did not.”

Peter Mugendi, the current CEO of Remu Microfinance, added that the outcry on credit information-sharing may be justified, particularly as the financial concept is yet to reach international standards. To get it there, he said, requires a lot of education.

“There are some banks that will push you to open an account with them,” he said, adding that some people agree and then forget about it.

“Normally, you will be told that you can open an account without even putting a minimum balance in it, but after one month, you start being charged some fees. At some point, the account goes into debit. That is considered a credit, and such a person is blacklisted.”

Wrong information

John* was forwarded to CRB over a credit of just Sh200, following a ledger fee charged on his account. He said the amount accrued after his salary was delayed.

“I learnt that I had been blacklisted when I went to apply for a loan from another bank,” he said.

John does not want his name or the name of the bank that blacklisted him revealed, as the institution has since owned up its mistake and is working on resolving the issue. Fortunately, he has the luxury of time.

The same thing can happen with a credit card when one has a balance and defaults on it. A lot of people do not see this as a loan, said Mr Mugendi, and they end up being blacklisted.

Utility companies, such as water firms and Kenya Power, are also being roped into information sharing. The power distributor, for instance, was owed Sh3.9 billion as at March 31 this year.

Also, the Higher Education Loans Board (Helb) last year announced it would begin forwarding the names of defaulters to CRBs, a move that has raised heated debate on social media.

Helb has had trouble following up on loans, with some beneficiaries failing to remit payments years after securing jobs. The Auditor General’s report for the 2013-14 financial year released in July this year shows Helb beneficiaries owe the revolving fund a total of Sh21.9 billion.

And while a CRB can maintain wrong information, such as linking someone to another person’s account, it is protected from liabilities arising from such errors.

“It is really sad that my sister died for something that I could have easily dealt with had I been notified in advance,” said Ochieng, underscoring the unintended consequences of the credit-rating system in its current form.

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*Names changed to protect privacy