Picture this: One has Sh5,000 in their pocket, which they intend to use in five days’ time. A friend approaches them seeking to be lent Sh5,000 with a promise to return the money within four days.
If the money is returned within four days, the plans of the person lending the money won’t be disrupted. But if the borrower delays - or takes off with the money and switches off the phone - the plan is disrupted.
Because of the risk that one may borrow and disappear, the owner of the money will need information on the borrower before deciding whether to lend or not.
And most likely, if this friend is generally associated with risky conduct such as drinking away their salary, he or she may not be trusted to borrow Sh5,000 and return in five days.
That is what banks do also. They want to know ones past behaviour in terms of credit and try to predict future behaviour.
Does this person return borrowed money? Do they return it on time? Have they ever failed to repay? On average, how much have they been borrowing? What do they want to do with the money this time round?
Answers to these and several other questions will guide lenders such as banks and Saccos in deciding whether to lend a customer or not.
To get most of these answers, they rely on CRBs - companies that collect, store and collate credit information on individuals and companies from different sources and provide the information in form of a credit report upon the request of a lender.
Kenya has three licensed CRBs— Metropol Corporation, TransUnion and Creditinfo International.
A credit report gives detailed information on a person’s credit history. The information on the report includes details such as name, marital status, email, mobile phone number, employment details, loans being repaid, loans that were repaid, loans that are in default and history of bounced cheques.
So where do the CRBs get all this information? CRBs receive credit information of customers on a monthly basis from lenders.
In short, every month, banks and other financial institutions such as microfinance banks, Saccos and regulated digital lenders inform CRBs if you are still repaying that loan or not.
The CRBs then use the information to generate one’s credit score. Generally, you are doing poorly when your score is low and better when your score is high.
And this has implication on the cost of accessing credit. One with a good score is likely to access another loan much faster and at a relatively lower rate compared to one with a poor score - because one good turn deserves another.
The information collected by the CRBs is crucial to banks, microfinance institutions and Saccos in assessing the borrowers’ ability to repay loans. They, therefore, use CRB as a credit information-sharing tool.
So for instance, when one defaults on a loan from one financial institution and goes to another for another loan, this new financial information is able to know.
The credit report is like a note saying, “As you deal with this customer, this is what you need to know about him or her when it comes to paying back borrowed money.”
So whether one has been paying loans or defaulting, their names and other details are with CRBs as a reference for future lenders. So its is not a death sentence for ones name to be at the CRB.
Sammy Omukoko, the managing director at Metropol Corporation told the Standard in mid-May 2022 that CRBs have details of about 19 million Kenyans.
This does not mean 19 million loan accounts are in default. Some are positively listed, meaning they are repaying their loans. But some are negatively listed, meaning they have defaulted on their loans.
Being listed means having one’s particulars, in regards to risk profile, with CRBs.
Being blacklisted only applies when ones’ profile is marked as a defaulter. CRBs either do a positive listing or a negative listing.
Being negatively listed does not however mean one cannot access a loan. It just means they are rated as high-risk borrowers and that lenders have to exercise extra caution.
Negative information includes dishonoured cheques, any cases of fraud, credit defaults and late payments of any loan.
Before a financial institution lists a customer as a loan defaulter, they are required to give the customer a 30-day notice. If no action is taken, this is when they are negatively listed.
Those negatively listed may therefore end up being treated with tougher lending conditions, including higher interest rate, additional checks before loan approval and a lower loan limit.
This is because lenders use the CRB history to try and make useful predictions about how one will behave in the future. A default listing is retained on CRB for five years from the last date of payment.
Banks in November 2019 stopped operating under the interest rate cap regime and have been migrating to risk-based lending, meaning that each customer is charged their own rate depending on their risk.
So, a customer with a good repayment history is likely to enjoy a relatively lower rate compared to one with a history of defaults.
The law requires full file information sharing. CRBs get data on when you pay and when you don’t pay.