Margaret Wanjiku is vegetable and fruits seller in Nairobi. The mother of two wakes up at around 4am, fetches her phone and pulls up her M-Pesa.
She navigates to M-Shwari, a mobile banking service owned by Safaricom and Commercial Bank of Africa which allows subscribers to save and borrow money through their mobile phone.
Here, she borrows at least Sh1,000 which she uses to buy her day’s stock of grocery from Nairobi’s Marikiti Market.
But there is something she won’t forget. “In the evening, after I am done for the day, I have to ensure that I have paid the debt. I do not want to be blacklisted,” says Wanjiku. What she does not know is that the credit she keeps on securing from the lender is pegged on that consistent repayment.
Wanjiku is one of the millions of Kenyans who are being given credit based purely on their reputation, in what is fast contributing to the development of ‘reputational collateral’ in Kenya.
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This kind of collateral’ has grown with ‘leaps and bounds’ with the rise of mobile credit, making it the next frontier for the country’s financial inclusion, whose growth has been frustrated by lenders’ emphasis on permanent collateral such as land title deeds and car logbooks.
The 2016 FinAccess Household Survey showed that about 15.1 per cent of Kenyans use Mobile Financial Services.
And of the customers that used banks, about 3.7 million of them used mobile bank accounts such as Equitel, KCB M-Pesa, M-Coop and M-Shwari. These three rely heavily on reputational collateral to give loans.
The main anchors of ‘reputational collateral’ are credit reference bureaus (CRBs) which for long have been viewed by the public as a tool for the banks against borrowers.
For M-Shwari, the first place to look at before it ‘automatically’ gives or rejects Wanjiku’s loan request is the CRB though some clients say they get credit from the financial institution despite being listed by some CRBs.
A CRB is a firm that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. And for such mobile credit services such as Kenya Commercial Bank’s KCB M-Pesa, having a negative rating at any of the three CRBs means you will be automatically denied credit.
“A good credit history — sometimes referred to as “reputational collateral”— minimises the perception of risk, thus enabling an individual or firm to gain access to financing,” says the World Bank in its recent report.
In the World Bank’s Ease of Doing Business Report 2016, Kenya moved up 28 places, buoyed by improvement in the ease of accessing credit.
This was after the country passed legislation that “makes it possible for financial institutions to share customers’ positive information, thus making it easier for entrepreneurs to access credit.” “CRB is now the reputational collateral,” says Erick Onderi, deputy registrar at Tatua Centre, an independent office set up to resolve all CRB-related disputes between consumers and lenders. Onderi says CRBs take all the credit information of a borrower- whether negative and positive.
This credit information goes towards building a consumer’s score. It is this score that lenders use to give loans.
But the “credit invisibles” such as Branch, Tala, Branch, Saida, Zidisha and Micromobile mobile apps which offer unsecured micro-credit through mobile phones go beyond CRB to in their search for reputational collateral.
For these apps, it is so nuanced. Getting credit under these apps is so easy. John.... an underwriter in one of the country’s insurance firms, in a night when he was cash-strapped, was able to download the app, install, borrow, settle the bill and remain with some extra cash which he used as bus fare.
“We use smartphone data to build a financial identity for applicants. Our machine learning algorithms analyse over 2000 data points to make lending decisions. This includes MPesa transaction SMS, call behaviour and handset information,” says Sofia Zab, a marketing director at Branch.
“Sometimes, seemingly innocuous details can tell a lot about an applicant’s creditworthiness. For example, borrowers who call more than 15 people per week are 25 per cent less likely to default.” Zab adds:
“With the reputational collateral, it is easy for someone getting out of campus to jump right into credit even without a title deed, logbook or any other security,” said the head of communications at Tatua Centre, Everlyne Oloishorua. She explained that with the advent of mobile based loans, more people have been able to get loans and more information is known about them, so it is easier to gauge their reputation collateral and give them even bigger loans.
“Just a few years ago the Higher Education Loans Board was the only source of data for campus students, so once they left collage and wanted to take up a loan and start a business they would be required to get a title which they did not have,” she said.
“But now with Tala, Mombo and Branch, the Equitels and Mshwari’s they have a credit history which lenders can use to assess their payment behaviour,” she said.
Of course, there are issues with CRBs. For long, banks have used the negative information on CRB to penalise borrowers, but never used the positive information to reward good borrowers.
Already, Courts have ruled against banks that wrongly listed borrowers.
Barclays Bank was ordered to pay former customer Sh1 million for erroneously reporting him to CRB while a teacher was also awarded Sh200,000 after National Bank also wrongfully listed him as a defaulter.
Indeed, on August 10, just two weeks after Parliament passed the law limiting interest rates to four percentage points above Central Bank of Kenya’s (CBK) indicative lending rate, the regulator sent out a circular about CRB reports.
CBK’s Director of Bank Supervision Gerald Nyaoma wrote to banks, ordering them not to deny customer loans as a result of negative listing with CRBs. “Complaints have been raised that banks are out rightly denying customers’ credit on the basis of adverse listing. It was never the intention of using the credit information sharing mechanism as a blacklisting mechanism but as a risk management tool,” Mr Nyaoma wrote in the circular.
CBK also wanted banks to do away with the practices that had given CRB reports a bad name, insisting that lending institutions that have been listing customers erroneously ensure they only share accurate information.
“CBK essentially wrote to banks on the misuse of the mechanism telling them account changes are not loans. However consumers have an obligation to close down dormant account just like banks have an obligation to get in touch with dormant clients to ensure they are not dead,” said Onderi.
However, supporters of the move insist that CRBs have been revolutionised and are not the institutions they were between 2007 and 2013 where all they did was negatively list defaulting customers. “Instead, they are today used to create a profile of you giving you a score depending on several issues besides of whether you are paying or not paying your loan. It is this score that banks will use to decide the amount of money to lend you or if at all they need to lend you in the first place,” said Onderi.
CRB reports have also become important to Kenyans, especially under the rate cap law where banks are rationing credit away from those seen as risky borrowers.
CRB reports will generally give you a rating and it is up to the banks loan policy on whether they accept you as a borrower since it can tell whether you will default or not.“Your score can come down if several lenders are looking at your information in a small span of time because it shows you are desperate and are applying for loans everywhere,” Ms Oloishorua said.
Meticulous analysis on credit data, for example, shows that those aged 20 to 25 have a higher default rate because they have less money but are prone to excessive spending while those aged between 30 and 35 have a lower default rate because they have more money and families so they are conservative spenders, explained Oloishorua.The score will also depend on your credit history and several other data sets that are kept by the credit reference bureau that try to predict behavior.
And soon, there will be a whole wealth of one’s credit information for lenders to use as collateral, especially after utility providers for electricity, water and telephone bills also showed interest in placing the credit information at CRBs.
The Finance Act 2016 amended the Banking Act to allow power, water and telecommunications firms to refer defaulters to CRBs.
And the World Bank sees no problem with this. “Research in 27 transition economies shows that introducing a credit reporting system is associated with an increase of 4.2 percentage points in firms’ reliance on credit.
Such an effect would be welcome in the Middle East and North Africa, where banks cite lack of transparency among small and medium-size enterprises and weak financial infrastructure as the main obstacles to lending more to such enterprises,” said the Bretton Woods institution.