Credit reference bureaus go after micro-lenders

Efforts by monetary authorities to include micro-finance institutions (MFIs) into the credit information sharing bracket has moved a notch higher.

This follows plans to launch a pilot programme to extend credit information sharing to MFIs and the Savings and Credit Co-operative Societies by August.

 “The law has been amended to allow microfinance institutions to share credit information, but the regulations have not been finalised,” said Jared Ketenga, project manager at the Kenya Credit Information Sharing Initiative.

“ We are concentrating on commercial banks, but in a short while, we expect to launch the mechanism for micro-finance institutions,” added Ketenga.

“In August we intend to launch a pilot project for the MFIs. It is a testing process to see how their systems can link with Credit Bureaus.”

Information sharing

Credit information sharing facilitates the building of information capital that guides the pricing of loans by financial institutions.

Credit Reference Bureaus (CRBs), which gather and store   information on borrowers’ credit history, seek to help commercial banks tighten their lending guidelines with a view of controlling the level of non-performing loans (NPLs).

Huge provisions for NPLs have previously eroded banks bottom-line and stoked their financial mystery in harsh operating environment.

CRBs are expected to be pertinent  to borrowers in the informal and small and medium enterprises that have a  good track record and performance, to use their   reputational capital to access credit.

According to the Central Bank of Kenya (CBK) latest data, the ratio of non-performing loans to gross loans improved from 6.3 per cent registered in December 2010 to 4.4 per cent in December, last year.

The reduction in credit risk is largely attributable to enhanced appraisal standards deployed by banks.

High cost of credit has constrained the expansion of businesses and deterred access to credit by a significant proportion of locals.

CRBs were introduced following efforts between CBK and commercial banks in 2009, after the Banking (CRB) Regulations, 2008 became operational on   February 2, 2009.

Kenya has two licensed credit reference bureaus, Metropol and Credit Reference Bureau (CRB) Africa Limited The banking sector was in the 1980s and 1990s saddled with a momentous NPLs portfolio invariably leading to the collapse of some banks.

Loan defaulters thrived in the “information asymmetry” environment that prevailed due to lack of a credit information sharing mechanism.

The development of a sustainable information sharing industry is recognised as a key component of financial sector reforms.

Credit history

Credit history not only provide necessary input for credit underwriting, but also allow borrowers to take their credit history from one financial institution to another, thereby making lending markets more competitive and, in the end, more affordable.

Commercial banks are also working on a new legal framework that will enforce the sharing of positive information on borrowers’ credit status.

This has been made possible through an amendment to the CBK Act.

Mr Habil Olaka, the chief executive Kenya bankers Association, the industry’s umbrella body said the banking industry is keen to begin sharing positive data as soon as the legal framework is put in place.

“The CBK is preparing relevant regulations to be issued very soon,” said Olaka.  The move is  part of attempts to ward off negative public perceptions  paint that CRBs as institutions seeking to shame and blacklist loan defaulters.

Although CRB regulations mandate the sharing of both negative information on non-performing loans as well as positive information on borrowers commercial banks have tended to focus on the former.

Bargaining power

Olaka noted sharing good information on borrowers’ credit history would boost borrowers bargaining power when negotiating for better terms on new loans.

 “The perception of credit bureaus in the market is that they merely blacklist. This is making many people to shy away,” said Sam Omukoko, managing director for Metropol Credit Reference Bureau.

The proportion of bad debts within the banking industry is estimated at about five per cent while 95 per cent of the borrowers are good.