Kenya: Credit Bureaus Herald Era of Financial Discipline

Feb 2010
Nairobi, Kenya, February, 19 2010 - Last week, the Central Bank of Kenya moved to license the first credit bureau, the Credit Reference Bureau (CRB), a hallmark achievement which CBK says will have a positive impact on the economy.

A survey conducted seven years ago by the International Finance Corporation (IFC) on the importance of a viable credit information infrastructure found out that one main challenge facing the banking fraternity was not only growing competition for the underserved such as retail and small businesses, but also lack of strategies and skills to tackle impediments associated with this market.

IFC said credit bureaus had a pivotal role to merge the two challenges and as a driving force for borrowing, while mitigating non-performing loans which had dogged the local financial industry for years.

Last week, the Central Bank of Kenya moved to license the first credit bureau, the Credit Reference Bureau (CRB), a hallmark achievement which CBK says will have a positive impact on the economy.

Plans are now under way to license two more players, Metropol Credit Reference Bureau and Compuscan Limited.

CRB is a local company with a footprint in 12 African countries and it is authorised to share credit information with and among the banks.

Business Daily spoke to CRB's chief executive officer Wachira Ndege on the significance of credit bureaus.

What is the immediate impact we can expect with the licensing of CRB?

A culture of financial discipline will be instilled since consumers know that they will be monitored. A debt will always be reflected on the account. That level of consciousness is very important to credit worthiness.

The primary idea is to make it possible for people's payment behaviour to be retained independently and impartially.

A good borrower should be able to demonstrate to a bank that they have a good credit risk and, therefore, obtain either easy terms of credit and the pricing should be lower as compared to someone with a higher credit risk.

In this market, the only clients that are able to get a good base rate are the blue chip companies because the banks consider them excellent risk.

Does the bureau negate the use of collateral to access credit?

Collateral does not guarantee payment. It should only be insurance, in the event one is unable to pay. It should never be the basis on credit lending. The only guarantee is the payment behaviour of the borrower

Women have traditionally been denied credit due to lack of collateral, since only two per cent own land. What does this mean for them?

Women will absolutely benefit since it has been established they are better credit risk. Men are more reckless and know not to honour their financial obligations.

What happens to a borrower who already has a bad track record?

There is an opportunity to rehabilitate yourself. If your information is reported showing the default rate, the only recourse is coming up with a new repayment plan, and once the debt is settled, the bureau will be notified. Therefore, your account will be positive; the credit history is not based on retrospect information but current update.

In case there is a dispute with the bank on an outstanding debt, what approach can a borrower take?

In the books of the banks, the original amount that was outstanding by the time you went to court, that is what would traditional be reported. But as a borrower you have the right to come to the bureau and tell of the dispute and if it is confirmed by the CRB, we wait for the court ruling.

How secure is the kind of information you have on millions of Kenyans in your data base?

Bureaus operate under a very strict confidentiality clause. You can imagine the power of the information we have here. The only person who has access is the data subject (borrower) or the institution you have approached for a facility. No bank can access that information unless you have initiated it, by being a customer. The law is very clear, on who should access the information, even internally in the bureau.

The information is not readily available; there is a certain procedure we must follow before disclosing the information. We must validate the source.

Other than financial institutions, who else can submit data to the bureau?

At this time, the law only permits licensed institutions such as banks but other sources who we call 'third party' can be identified and with the approval of the Central Bank we can include them for data submission. This is how institutions such as Helb, Nairobi Water and Sewerage Company came into the picture.

What about shylocks? Are they recognised as a formal business?

Shylocks can become formal business if they wanted; if they are registered and licensed.

The only problem with them is the punitive interest rate they impose, irrespective of CBK recommendations. Having said that, bureaus are only effective where there is an open referencing system where data submission is flowing from all sources of lenders, which will include microfinance institutions and saccos.

Looking at other African countries you have ventured into, what are some of the challenges you expect in Kenya?

The bureau initially has to deal with subscribing information and it is normally difficult if the information is available electronically.

Collection of data from scratch can prove to be a challenge before institutions are accustomed to it.

Some vital information such as date of birth, gender, identification number may be missing.

Is this not negligence on the part of the bank to miss such information under 'know your customer' matrix?

They may have this information but on a piece of paper. Inputting loads of data manually takes time, yet we need it electronically. However, most of the banks in Kenya have most of the data we need.

Reporting protocol is another issue since the requirement is that the information should be updated monthly in order to ensure accuracy, which is the responsibility of the bank since they are dealing with the borrowers.

What impact can we expect on the economy?

Statistics shows credit bureaus can make a difference of between 2-5 per cent on GDP for example in Latin America countries. But it all depends on the implementation of the bureau.

It can only be effected is information is submitted and shared across the board, what we call full-file information, where all economic sectors are involved.

Though non-performing rate has come down substantial from 40 per cent in the 1990s to about 10 per cent, we expect this to reduce even further since banks will not lend blindly.

Source : allAfrica

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