Good for CRBs, better for financial institutions, best for borrowers: CBK Governor breaks down new CIS regulation

CBK Governor Dr. Patrick Njoroge

Central Bank of Kenya Governor Dr. Patrick Njoroge has said the new regulations on Kenya’s Credit Information Sharing (CIS) system is meant to activate the intended benefits of an efficient CIS system.

The new regulations, published on April 8th 2020, replace the framework that has been in place since 2013 and provide for the licensing and supervision of Credit Reference Bureaus (CRBs) by CBK.

In a statement, Dr. Njoroge said the previous framework fell short of creating an environment for the exchange of borrower’s credit information between lenders and CRBs.

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“The Credit Information Sharing (CIS) mechanism aims to bridge the information gap about borrowers’ creditworthiness—by taking into account the borrower’s credit history and allowing credit to be priced accordingly. A good credit record resulting from a good repayment history demonstrates the borrower’s higher creditworthiness and should lead to a lower cost of credit,” explained Dr. Njoroge.

“It is, therefore, an important tool in ensuring that the banking sector works for and with Kenyans, as was outlined in the Banking Sector Charter that was launched in February 2019 by CBK.”

CRBs in Kenya have been punitive with listing often viewed as a negative outcome of the credit process. Borrowers that have been ‘blacklisted’ for defaulting on their loans have been barred from accessing credit, instead of helping borrowers take advantage of their credit history to get better pricing of loans.

To illustrate this point, Dr. Njoroge said there are 378 million records in CRBs, of which, 42 million are blacklisted. Of these, 13 million are being blacklisted for amounts less than Sh1,000.

The new regulations will also address complaints from customers about slowness in updating CRB records after payment arrears have been cleared and delays in correcting errors by lenders who mistakenly “blacklisted” compliant borrowers.

“Unregulated digital (mobile-based) and credit-only lenders were seen as particularly outrageous in using CRB listing and other measures to harass delinquent borrowers,” added Dr. Njoroge.

When CBK published the new regulations, it also withdrew the licenses of a number of credit-only lenders as third party credit information providers to CRBs.

“The withdrawal is in response to numerous public complaints over misuse of the Credit Information System by the unregulated digital and credit-only lenders, and particularly their poor responsiveness to customer complaints,” said CBK in a statement.

So what do the new Credit Information Sharing regulations mean to borrowers, digital-only lenders, CRBs and financial institutions? Who are the winners and the losers in this new CIS framework?

Borrowers

One major win for borrowers is that any amount less than Sh1,000 that lenders have classified as non-performing will not be shared with CRBs. In addition, over 5 million unique borrowers, comprising more than one-third of the borrowers in CRBs – that were “blacklisted” for amounts less than Sh1,000 will be “delisted.”

The new regulation also allows first-time CRB clearance certificates to be issued at no charge, a factor that youth and graduates have often cited as a barrier when applying for jobs.

These measures, including protection from some predatory mobile lending practices, will provide a better safety net for borrowers.

The CBK had earlier announced that there will be a 6-month moratorium ending September this year that prevents lenders and CRBs negatively listing borrowers who have defaulted as part of Covid-19 mitigation measures.

Mobile lenders

Unregulated digital/mobile lenders and credit-only lenders have been prohibited from providing information about their borrowers to CRBs which is likely to increase their exposure to defaulting borrowers. It is however not clear if the mobile lenders can still query CRBs on the status of a potential borrower. Digital lenders such as Tala, Okash, Branch, Okolea, Zenka, LionCash and about 60 other mobile-only lenders may have to rethink their credit scoring model.

SACCOS

Over 160 SACCOS regulated by the Saccos Regulatory Authority (SASRA) will now provide and access information from CRBs, similar to commercial banks and microfinance banks. This will enhance SACCOS due diligence process when issuing credit to borrowers as well as enrich the CIS system with more data.

CRBs

Credit Reference Bureaus will lose some revenue from forfeiting the fee for first-time CRB certificate requests but this will be easily be offset from the business that will come from about 5,000 SACCOS regulated by the SASRA. CRBs will also have to delist 5 million borrowers who have been blacklisted for amounts less than Sh1,000 according to the new regulations.

Additionally, CRB’s will be under tighter scrutiny from CBK with the regulator setting minimum capital requirements to ensure CRBs are financially sound. If the capital requirement is steep, some CRBs will have to merge or seek investors to shore up the CBK requirement. The Bureaus might also need to reconstitute their Boards in line with CBK guidelines to reflect diversity.

Banks

The essence of the revamped CIS framework is to ensure banks adopt a risk-based pricing approach that takes into account borrowers’ credit reports in the pricing of loans. Banks will now have to enhance their customer service protocols to promptly resolve customer complaints including those relating to CRBs.