CBK suspension will hurt small borrowers

Small borrowers will end up paying more for bank loans because of the CBK's decision to suspend listing of non-performing loans below Sh5 million at CRBs

In Summary

• Government has ordered that small borrowers should not be given negative credit listings if they cannot pay

• Banks are legally obliged to consider the credit history of small borrowers so they can get lower lending rates,

CBK Headquarters
CBK Headquarters
Image: FILE

The Central Bank has instructed that borrowers defaulting on loans below Sh5 million will not be blacklisted by credit reference bureaus (see P12).

The suspension applies to borrowers who become non-performing after October 1, 2021, and will remain in effect until September 30, 2022.

During the Covid epidemic, government suspended negative credit listings from April to September 2020. On Mashujaa Day, President Uhuru Kenyatta ordered that the suspension should be restored.

This decision is counter-productive even if it is made with the best of intentions.

Efficient markets require information. This directive means that banks will be lending in the dark for the next 12 months for amounts below Sh5 million.

If you have a loan of less than Sh5 million, you can now stop paying and you will not get a negative credit listing. This will increase the number of non-performing loans in Kenya.

To make matters worse, responsible borrowers will pay the price. Banks are now legally required to consider the credit history of borrowers to enable them to access cheaper credit. Now that there will be no reliable credit score, all small borrowers are likely to pay more for their loans.

Quote of the day: "Extinction is the rule. Survival is the exception."

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The American astronomer was born on November 9, 1934