Law changes planned to cut credit risk in Saccos, SMEs

By James Anyanzwa

Central Bank of Kenya (CBK) plans to amend relevant laws that will allow deposit taking microfinance institutions (MFIs) and Saccos to participate in Credit Reference Bureaus (CRB).

Prof Njuguna Ndung’u the bank’s Governor said the move is part of CBK efforts aimed at achieving an increased rate of financial inclusion by extending the reach of credit information sharing mechanism beyond the banking sector.

Ndung’u said credit information sharing offers the country an opportunity to promote access to affordable credit because information lowers risk premium and search costs.

Track record

This is particularly pertinent to those borrowers in the informal and Small and Medium Enterprises (SMEs), who have a track record and good performance to use it to access credit.

Currently the law only allows only commercial banks to share information about the borrowers’ credit history.

"CBK is working on modalities of incorporating deposit taking MFIs into these CRBs. We want MFIs to participate in this credit information sharing," said Ndung’u.

Central Bank Governor Prof Njuguna Ndung'u and SMEP DTM LMD chairman Gabriel Kivuti (middle) at the launch of SMEP DTM Limited Tuesday in Nairobi. PHOTO:MOSES OMUSULA/ STANDARD

"We need to change the collateral technology that we are using because this will bring many people into the financial system who do not have assets to act as security."

Ndung’u emphasized the need to scale up financial inclusion saying it was the true path of fighting poverty in the country.

Latest data shows that about 33 per cent of Kenya’s bankable population is excluded from formal and informal financial services.

"The weapon for fighting poverty is actually access to markets. There is a large market out there to tap into," said Ndung’u.

He was speaking during the official launch of SMEP Deposit Taking Microfinance Limited (SMEP DTM) to carry out nationwide deposit-taking microfinance business.

SMEP DTM was licensed as deposit taking MFI in December last year. It became the fourth deposit taking microfinance institution after Faulu Kenya, Kenya Women Finance Trust and Uwezo DTM Limited, which were licensed in May 2009, March 2010 and November 2010, respectively.

SMEP DTM Limited evolved from the Small Scale Business Enterprise Programme (SSBE), a project of National Council of Churches of Kenya (NCCK), which was started in 1975.

Ndung’u said current level of interest rates is a combination of costs such as information search costs, risk premium and the banks’ profit margin.

He said credit by the banking sector in Kenya has to a large extent been underwritten by physical collateral such as land and borrowers without access to such collateral have been constrained in accessing credit.

SMEs and individuals have been constrained in accessing affordable credit due to the perceived higher risk attached to them on account of lack of physical collateral.