Review suspension on listing of CRB borrowers

In Summary
  • Reporting actual credit history to CRB’s is paramount to creating a well-built national credit scoring system
  • Before the corona crisis digital lenders were issuing over Sh50billion worth of credit to around four million customers monthly

The suspension on the listing of Credit Referencing Bureau (CRB) borrowers owing less than Sh1000 is turning out to be detrimental to information quality and could increase a pile of bad debts in future.

Credit Reference Bureaus are of great importance to the financial sector anywhere in the world and are meant to aggregate all information about borrowers both positive and negative, and in facilitating leveraged decisions in availing of credit to consumers.

The thinking behind denying digital lenders access to the Credit Reference Bureaus may on the surface appear useful but needs to be re-evaluated to enhance information quality in the county’s lending market.

For months now the mobile-based, unregulated digital and credit-only lenders, as third-party credit information providers have not been able to submit credit information on their borrowers to CRBs whether positive or negative.

This, therefore, means that participants in the credit market do not have the accurate projection status of loans advanced to these borrowers and lack of this information makes it difficult to approve new credit and or increase the credit limit to allow borrowers meet bigger goals.

This is especially painful to the vast majority of borrowers that repay their loans diligently and in normal circumstances would have been rewarded for their credit behaviour through the continuous upgrade of their credit score.

The CRB directive has negatively impacted on these lenders’ ability to differentiate between viable and non-viable customers, thus making it difficult to deploy much-needed funds to start-ups, small business owners and day-traders.

During the pre-Covid-19 crisis, digital lenders were issuing over Sh50billion worth of credit to around four million customers monthly.

After the directive, the number of customers served dropped to around 300,000 due to risk aversion.

One of the main reasons for regulating banking business is to mitigate the risks of information asymmetry, but the directive is aiding in this.

It is important to note that any information on the performance of debtors and with regard to low figures of below Sh1000 or more; is very useful in mitigating the increase of non-performing loans in the economy.

In all advanced economies, CRB reporting is not limited by loan amounts because CRBs and market participants understand that good credit behaviour starts with how borrowers repay small loan amounts.

That is one of the reasons lenders in the US avail small credit limits (e.g. credit cards or overdrafts) to new customers and then gradually increase them once customers show the ability to repay.

Digital lenders serve the biggest population of previously unbanked and have over the years endeavoured to boost financial inclusivity. This segment means well for the wellbeing of Kenyans and Kenya’s economy.

To encourage responsible lending, we strongly believe that it should be made obligatory for any lender to check customer’s creditworthiness by pulling credit reports from Credit Reference Bureaus (CRBs).

This, they should do by developing appropriate scoring models that will not discriminate good customers while adapting the available lending facilities to the actual needs of the consumer.

Reporting actual credit history to CRB’s is paramount to creating a well-built national credit scoring system that will be beneficial to all stakeholders of the financial industry.

Robust credit history is the heart of financial inclusion worldwide and it has been made possible only through the proliferation of mobile financial technology infrastructure.

Imagine trying to solve the financial inclusion challenge worldwide while forgoing digital technology; one word to describe it is – impossible.

We need to be aware that traditional scoring models are obsolete in developing world countries where the vast majority of the population is financially underserved and has never used a lending facility from the banking sector.

It is exactly the opportunity where a blend of Credit Reference Bureaus data and alternative data scoring powered by Artificial Intelligence need to step in to bridge the financial inclusion gap.

We also respect the importance of data privacy and we fully acknowledge that consumers are the owners of their data and can (or even should) check what type of data financial institutions are holding and how the information is being processed.

Data protection is linked to consumer protection and is central to developing a regulatory framework that will ensure all participants in the financial market are fully professional and transparent in this matter.

It’s time for the government to reflect on the remarkable journey of enhancing the national credit history database supported by digital lending platforms and consider reviewing the suspension if it is desirous of supporting financial inclusivity and reducing bad loans using clear credit data points.

The writer is a Financial and Risk Management consultant at Marlite Consultants.

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