The treasury has introduced fine regulations with the aim of clearing the CRB blacklist and enhancing chances of borrowers’ loan approval. Banks, saccos and micro finance lenders will now face a fine of Sh2 Million for every defaulter who is denied loans on account of being listed with the credit Reference bureaus (CRB)
The new regulations have been set in an attempt to enable firms and individuals who have been affected negatively by the COVID-19 to access more funds. Most financial institutions have been reluctant to offer loans to about 2.5 million Kenyans listed with the CRB.
The introduction of penalties to the lenders is in line with the government’s expectations of the financial institutions to boost cash flow of companies and workers who have been worst hit during the Coronavirus pandemic. The virus has resulted in salary reductions, massive lay-offs and low demand for products in the market leaving families and companies straining to keep afloat.
“An institution that denies a customer a credit facility or any other financial service solely on the basis of a credit score shall be liable to a monetary penalty of 2 million shillings or such other sanctions under the Act, the Microfinance Act, 2006, or the Sacco Societies Act, 2008, as the Central Bank may impose,” says Treasury Secretary Ukur Yatani in the new CRB regulations.
Lenders can only reject a loan application due to other reasons and not their Credit score earned from the CRB listing. The institutions must inform the borrowers in writing about the reasons for rejection of their loan applications.
The Credit Reference Bureaus were established in 2010 with an aim of helping banks assess the risk of lending, which would also help in lowering the cost in credit for the consumers. However, instead of reducing rates, CRBs have been used to punish defaulting and blacklisted borrowers.
“The score should not be a basis for you being denied; it should be a basis for banks to be able to price the risk,” said Habil Olaka, CEO of Kenya Bankers Association — the bankers’ lobby group.
“People have been denied a credit facility for being listed with CRBs, which is the kind of abuse they are trying to address. That is why the unregulated digital lenders have been kicked out,” he said.
The new rules by the Central Bank stopped unregulated digital money lenders from forwarding names of their defaulters to the CRB. This was due to a public outcry over the widespread misuse of the credit information sharing (CIS) mechanism by the unregulated digital money lenders. This means only banks, saccos, micro-financiers and deposit taking institutions are allowed to blacklist their defaulters, locking out firms such as Branch and Tala.
The regulated digital lenders, commercial banks and saccos have also been barred from listing defaulters with loans less that Sh1, 000 or have been unable to clear less than the set amount of their balance.
Data acquired from the three CRBs- Metropol, Trans Union and Creditinfo international- showed that there was an increase in the affected borrowers’ accounts from 2.7 million in 2019 to 3.2 million in March this year. Of these, about 1 million were listed from digital mobile lending apps with loans of less than 1,000.
CBK data shows that non-performing loans rose from 9.5 percent in 2017 to 12 percent last year and remaining in double digits for the first time since 2007.
Due to this, property seizures have increased as well as the number of defaulters reported to the CRB, and reduced borrowers’ chances of accessing more loans.
In recent years, more banks have increased the use of CRB reports as a determinant for loans disbursement. Banks requested for 12.4 million CRB reports in 2018, up from 4.3 million in 2017 and 1.6 million in 2014.
Kenya also suspended CRB listing for loans defaulted from April 1st as a way of cushioning distressed individuals and companies that have been hit hard by the effects of the Covid-19 pandemic.
Official data revealed that loan defaults have increased by 55.6 percent in the three years to December, reaching 333.3 billion or 12 percent of 2.7 million loans advanced. As a share of total credit advanced, bad loans stood at 5.6 percent and 6.8 percent in 2014 and 2015 respectively. This has happened at a time when the Kenyan economy is suffering and has resulted in job cuts and low wages, leaving thousands of consumers in debt.
Many workers have ended up taking billions in loans without collateral for short terms needs such as vehicles, furniture and essential family needs like healthcare.
Default rates are expected to go up during the Coronavirus crisis that has affected the financial stability of many Kenyans.