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November 21, 2018

Using your credit score to negotiate for cheaper loans

THE Central Bank's Monetary Policy Committee on Tuesday signalled a higher interest regime after increasing the Kenya Banks Reference Rate, the industry-wide base rate for pricing loans, to 9.87 per cent from 8.54 per cent.

The KBRR is calculated as an average the Central Bank rate and that of the 91-day Treasury bill rate, both of which have gone up.

The CBR, the minimum rate the CBK lends commercial banks, was also raised by 150 percentage points for the second month in a row, hitting 11.50 per cent — the highest since November 2012

In pricing loans, banks add operational expenses including incidental costs and profits to the KBRR, meaning a rise in the cost of borrowing is inevitable if the base goes up.

Despite the introduction of Kenya Banks Reference Rate on July 8, 2014 at an inaugural 9.13 per cent, many banks continued to charge interest way above this with some as high as as high as 24 per cent, arguing that the borrower's risk profile determines the cost.

Commercial lending rates, for example, averaged 15.26 per cent in May when KBRR was 8.54 per cent, way above government's desired single-digit charges, although marginally easier than 16.9 per cent before the industry-wide base was enforced.

However there are borrowers, both individuals and businesses, who get loans at interest rates lower than 10 per cent.

Those with perceived high risk profile are slapped with higher rates, while those seen as less risk based on their borrowing history are courted with discounted rates.

The Central Bank, working with the industry came up with credit sharing mechanism among customers and lenders.

The ultimate goal is to help credit-worth borrowers access loans at cheaper rates, while helping lenders cut risks by avoiding defaulters or pricing their loans expensively.

Launched in August 2010, initially sharing information on loan defaulters and their subsequent blacklisting, the initiative went further grew and started sharing both negative and positive credit history on February 28, 2014.

The Credit Reference Bureaus Regulations 2013 thus expressly makes it mandatory for the 43 commercial banks and the 12 micro finance banks to share negative and positive credit data, with a window for other credit providers to join in.

In his Budget statement on June 11, National Treasury Cabinet secretary Henry Rotich sought to rope in the savings and credit co-operative societies.

" I propose to extend the current information sharing framework for Sacco’s from the current inter-Sacco sharing of negative information, to also allow sharing of positive information as well as sharing with other financial institutions," he said.

Three CRBs including Transunion (formerly TransAfrica) CRB licensed on February 9, 2010, Metropol CRB (April 11, 2011) and Creditinfo (April 29, 2015), are presently authorised to rate the risk perception of borrowers through credit scores.

Even before Rotich's draft policy directive, credit providers other than those regulated by the CBK, have voluntarily been sharing data on borrowers.

"We are actively going to microfinance institutions, Saccos and utilities to promote credit information sharing initiative because it's low,” Metropol CRB chief executive Sam Omukoko said in an interview. "Our aim is to ensure that the mechanism of sharing  information is done to the benefit of both lenders and borrowers.”


While sharing of credit history data was five years ago a hard sale to other lenders apart from commercial banks that are legally required to do so, he says, it is "now being received well".

 “What we tell them is that credit sharing is low and that the initiative is intended to ensure as many people as possible can have access to credit, Omukoko says.  "The more people access credit, the more the consumption because they then have purchasing power and this can only be to the benefit of growing their businesses.” 

For the borrowers, he says, it helps in rating their creditworthiness through credit scores.

"When your credit score is good it means you can access loan from different providers at affordable rates."

Uptake of credit reports among borrowers has however remained low at just 101, 288 reports between August 2010 and March this year, the CBK's quarterly banking sector performance and development report published on May 11 shows.

Only 12,752 reports were accessed by borrowers during the first three months of this year, slightly more than 11,134 reports over the three months to last December.

Banks requested 826,921 credit reports on  their borrowers over the same period, the CBK data shows, nearly double the 492,722 reports they accessed in the previous quarter to December. This means they have accessed 6.10 million reports as at end of March since the initiative was launched in 2010.


The biggest hurdle to increasing accessibility among borrowers, Omukoko says, is low levels of awareness and sensitisation on "services that CRBs are offering and their significance".

"Your credit score empowers you to negotiate for better terms because the more information is available on borrowers, the low the risk perception, " Omukoko says. "And if we have an environment where the risk is perceived to be low, then prices begin to come down.”

Last February, Metropol upgraded its mobile application for accessing credit score – Crystobol– which was first launched on July 4, 2012 in a bid to grow encourage access to the data from anywhere in the country.


The app enables borrowers to access their credit worthiness status at a one-off processing fee of Sh100 from their mobile phones from anywhere using a special SMS code. Metropol charges Sh250 for an additional report.

Under the law, all customers are entitled to a free report every year, but subsequent reports attract additional charges depending on the bureau.

Omukoko describes Crystobol app as a "game changer" in the fledgling credit information sharing industry since the three CRBs barely have physical presence outside Nairobi.

About 60,000 reports, he claims, have been sent out through the app since February, almost equalling the industry tally of 88,536 reports for borrowers in the four years to last December.

"For us the challenge is how do we get more and more borrowers to understand that it is important to get a credit report,” he says. " If you take a loan and service it well, it contributes to your good credit score and if you default it contributes to your bad score which will affect you in future.”

Credit reports are however susceptible to errors originating either from the credit provider's or the CRB's system.
This results in bitter disputes pitting the customer and the lender, with the bureau at the centre.

Association of Kenya Credit Providers, an umbrella body of lenders established in February 2014, has set up an Alternative Dispute Resolution mechanism to help solve arising disagreements.
The ADR framework is seen as a first option for resolving such cases before they go through the usually "lengthy and costly" judicial court processes.
"AKCP expects that a high number of disputes will be referred to the ADR," AKCP chief executive Jared Getenga said in a past intetview. "This will happen as more and more people become aware of the credit sharing mechanism."

Besides system errors, some of the disputes emanates from acts of ignorance from customers, including termination of deposits to accounts without closing them down.

"Some people think they closed accounts when they stopped depositing money in them, yet they left them with some small balances, the banks did not close them and charges have accumulated," the Metropol boss says. "The result is that they end being listed in the bureau as defaulters."

The fast growing uptake of micro loans through mobile phones, Omukoko says, is another area that borrowers need to be careful.

Popularity of mobile phone-based micro loans to clear small personal and business bills including post-paid power bills is growing by day.
Mshwari, owned by largest privately-owned lender,  the Commercial Bank of Africa, and KCB M-Pesa account, are the key players in the mobile micro lending space.  

They offer loans from as low as Sh100, with repayment period ranging from a day to a month.

Any arising defaults nonetheless lead to blacklisting that could ruin one's future chances  of accessing loans from commercial banks.

“They default and forget, yet they don't know that their names have been listed with the bureau since Mshwari or KCB M-Pesa are bank accounts," Omukoko says. "The day you wake up and seek a facility from a bank, the bank checks and find you are a defaulter, and at that point you start wondering 'how did it get to the bureau?'. ”

Under the CRB regulations, customers having a dispute on their credit report are required to first lodge it with the bureau.

The CRB has up to five days to detect the source of the error by verifying the data in its system with that from the bank.

“If we find that the error is not from our system, we go back to the bank which has 10 days to correct it,” Omukoko explains.

The customer should be able to know the status of her report within 15 days from the date she lodges the complaint.
If she is dissatisfied, her credit report is suspended as remedy is sought, preferably "through the ADR mechanism".

“We also suspend the report by flagging it if the bank does not respond after 10 day,” the Metropol chief says.

The number of complaints this year, he adds,  is however going down, with Metropol getting two on average per week from 10 last year.

“Since the system started we are now also receiving a lot of calls from customers who want details of their accounts including address corrected," he says. "If it's anything linked to bank account and balances we refer to their banks, but other details to do with their address and contacts, we can correct them ourselves because we are connected to IPRS (Integrated Population Registration System--official digital database of Kenya).”






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