Days numbered for serial loan defaulters

loan application form and dollar banknotes

Nairobi; Kenya: Thousands of loan defaulters could from next month fail to secure loans from any financial institution.

This is after Savings and Credit Co-operatives (Saccos) joined banks to blacklist loan defaulters who face the risk of being blacklisted by other lenders in future. Last week alone, tens of Saccos put notices in the local dailies warning their members and mainly those with outstanding loans to clear or enter into acceptable repayment plans failure to which their names will be submitted to Credit Reference Bureaus (CRBs).

Once loan defaulters are listed with CRBs they will remain barred from accessing loans for five years even after clearing the outstanding amounts.

Sound financial services

The initiative is expected to rein in on serial defaulters who have left Saccos grappling with Sh7 billion in non-performing loans. Saccos welcome the plan saying it will enable credit unions to price risks which have been a problem before.

Stima Sacco CEO Paul Wambua said the new approach will reduce information asymmetry which has been contributing to high defaults in the past. “This is positive development and demonstrates the maturity of our financial system. Further, it will be possible for Saccos to determine the credit worthiness of their customers,” said Mr Wambua.

According to the Credit Reference Bureau Regulations 2013, non-performing loans (underpaid for 90 days) will be listed with CRB. Financial institutions are supposed to share credit information of their customers with CRB to guarantee sound financial services delivery.

Sacco Society’s Authority (SASRA), the sector regulator signed a memorandum of understanding (MoU) with other financial regulators to be sharing credit information. The other financial regulators include Insurance Regulatory Authority (IRA), Retirement Benefits Authority (RBA), Capital Market Authority (CMA) and Central Bank of Kenya (CBK).

SASRA CEO Carilus Ademba told Weekend Business that the percentage of non-performing loans compared to total cumulative loans given out by all the deposit taking Saccos has been declining over the years.
According to the Sacco Supervision Annual Report 2013, the overall non-performing loans for licensed Deposit Taking Saccos dropped to 4.7 per cent of the gross loans compared to 7.3 per cent reported in 2012 compared to the industry standard of 5 per cent.

“The ratio of non-performing loans reduced from 7.3 per cent recorded in 2012 to 4.7 per cent in 2013 accounting to Sh8.9 billion,” said Mr Ademba. “For serial defaulters, their time is up as they have been a big burden to Saccos development. With adoption of the CRB mechanism, Saccos among other financial institutions will boost their liquidity and be able to develop more products to meet the financial demand of members,” said Mr Ademba. “The listing of the non-performing loans with the CRB will enhance financial discipline and enable customers to develop sound credit worthiness history.”

More competitive

Kenya Union of Savings and Credit Co-operative (KUSCCO) hails the initiative saying it will ease liquidity problems the financial cooperative have been grappling with.

KUSCCO Managing Director George Ototo said non-performing loans have been a big bother to majority of Saccos. He said Saccos currently receiving deposits from their members stand a better chance of offering financial services based on the fact that they are now guaranteed of protection against serial defaulters.

Loans in the performing category increased from Sh138.2 billion in December 2012 to Sh170.4 billion in December 2013 representing an increase of 23.3 percent. As at June 17, 2014, SASRA had licensed 184 Saccos to undertake deposit taking activities in the country.

Central Bank of Kenya (CBK) notes that credit history not only provide necessary input for credit underwriting, but also allow borrowers to take their credit information from one financial institution to another, thereby making lending markets more competitive and, in the end, more affordable.

Credit bureaus assist in making credit accessible to more people, and enabling lenders and businesses reduce risk and fraud. Sharing of information between financial institutions in respect of customer credit behavior, therefore, has a positive economic impact.