Kenya’s Cen­tral Bank to re­view credit rat­ing sys­tem over ‘un­fair black­list­ing’

Ref­er­ence bu­reaus said to be ig­nor­ing those with good credit his­to­ries

The East African - - BUSINESS - A JOINT RE­PORT The Eastafrican

The Cen­tral Bank of Kenya has started re­view­ing the credit in­for­ma­tion shar­ing (CIS) sys­tem fol­low­ing in­creased com­plaints that ref­er­ence bu­reaus are only con­cen­trat­ing on black­list­ing of de­fault­ers.

The li­cens­ing of credit ref­er­ence bu­reaus (CRBS) by the CBK was ex­pected to her­ald a regime in which cus­tomers would be given credit based on their re­pay­ment his­tory.

How­ever, since the in­tro­duc­tion of CIS eight years ago, the trend has been for banks to use the in­for­ma­tion to pu­n­ish cus­tomers with a bad credit his­tory in­stead of re­ward­ing loyal bor­row­ers.

In ad­di­tion, the meth­ods of as­sess­ing credit-wor­thi­ness are not stan­dard. The CBK has faulted CRBS for us­ing dif­fer­ent meth­ods of pre­dict­ing the like­li­hood of de­fault by bor­row­ers. The dif­fer­ent meth­ods give con­flict­ing credit scores for bor­row­ers.

The bor­rower is thus likely to be de­nied a loan by a bank for hav­ing a low credit score from one bureau whereas their score is high at an­other one.

The bank­ing reg­u­la­tor said the three li­censed CRBS — Metropol, Tran­sunion (for­merly Cr­bafrica) and Cred­it­info — have con­trast­ing credit rat­ing prin­ci­ples.

“There is a need to har­monise the scor­ing scales across the bu- reaus for ease of in­ter­pre­ta­tion by lenders and con­sumers,” said CBK’S an­nual su­per­vi­sion re­port (2016).

Jared Osoro a di­rec­tor of re­search at the Kenya Bankers As­so­ci­a­tion said that even though Kenya’s CRBS use dif­fer­ent mod­els to cal­cu­late the prob­a­bil­ity of de­fault by bor­row­ers, the dis­par­i­ties in the re­sults should not be too wide.

“Th­ese are dif­fer­ent busi­nesses do­ing the same thing. The mod­els should not be nec­es­sar­ily iden­ti­cal but they (mod­els) should come out with more or less sim­i­lar scores,” said Mr Osoro.

He said that CRBS are smaller ver­sions of rat­ing agen­cies which com­pute credit scores based on the credit his­tory of the bor­row- ers. “They look at the prob­a­bil­ity or like­li­hood of de­fault by a bor­rower and they com­pute a score. A bor­rower with a high like­li­hood of de­fault will re­ceive a lower score, while one with a lower like­li­hood of de­fault will re­ceive a higher score.”

Ac­cord­ing to Tran­sunion CRB, the data used in its credit scor­ing model in­cludes de­mo­graphic in­for­ma­tion — age, amount owed, length of credit his­tory, new debt, type of debt, and the number of credit en­quires in the bor­rower’s pro­file.

De­spite CBK im­pos­ing fines of up to $10,000 on com­mer­cial banks wrong­fully black­list­ing cus­tomers with CRBS, more Kenyans are still get­ting bad rat­ings.

“Banks are us­ing the CIS mech­a­nism pos­i­tively and neg­a­tively. Cus­tomers be­lieve it is be­ing used as a black­list­ing op­er­a­tion be­cause they are not get­ting the ben­e­fits of good credit per­for­mance,” said CBK Gover­nor Pa­trick Njoroge.

He added that the rationale of CIS should be to address the in­for­ma­tion asym­me­try and en­able banks to price credit risks more ef­fec­tively.

“In our vi­sion as CBK, cus­tomers’ credit his­tory must amount to some­thing. Good credit his­tory should be re­warded through lower in­ter­est rates. CRBS and banks must work to­gether to give cred­i­ble credit scores to be in­cor­po­rated into credit risk ap­praisal and pric­ing mod­els,” he said. “We have al­ready looked at some of the ex­pe­ri­ences that cus­tomers have had, and we have dis­cussed with banks and com­pared th­ese with in­ter­na­tional ex­pe­ri­ences, and we are em­bark­ing on the next step of im­prov­ing this whole frame­work.”

Ac­cord­ing to CBK, the law has been amended to al­low in­sti­tu­tions and CRBS across the EAC to share credit in­for­ma­tion on bor­row­ers across the re­gion.

“The amend­ment will en­able in­sti­tu­tions to have a holis­tic view of a cus­tomer’s credit his­tory and credit wor­thi­ness in re­la­tion to con­sump­tion of fi­nan­cial ser­vices ir­re­spec­tive of the ju­ris­dic­tion in which the ser­vices were ren­dered,” said the CBK.

Tan­za­nia has two reg­is­tered pri­vately owned bu­reaus — Dun & Brad­street Credit Bureau Tan­za­nia Ltd and Cred­it­info Tan­za­nia,

Rwanda has one reg­is­tered bureau, Tran­sunion, while Uganda has two — Com­pus­can Uganda and Metropol Uganda.

Last week, Metropol Uganda, a sub­sidiary of Kenya’s Metropol CRB, said it in­tends to launch a mo­bile based credit score check fa­cil­ity that will al­low bor­row­ers to check their credit wor­thi­ness on their phones.

Ac­cord­ing to the World Bank, CRBS pro­vide com­pre­hen­sive con­sumer credit in­for­ma­tion with value-added ser­vices such as credit scores to pri­vate lenders.

About 600,000 Kenyans have been black­listed by CRBS, some for de­fault­ing on loans as small as $1 pro­cured through mo­bile phones.

Good credit his­tory should be re­warded through lower in­ter­est rates.” Cen­tral Bank Gover­nor Pa­trick Njoroge

Pic­ture: File

Kenyan bor­row­ers say they are be­ing de­nied bank loans un­fairly.

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