CBK, CRBs and banks need a united front on sharing of credit information

The Central Bank of Kenya (CBK) and the three credit reference bureaus took out a paid advert in the leading dailies this week to explain what they are doing over the persistent concern that credit scores are being used to deny credit to Kenyans.

In its statement, which is available on its website, CBK has very helpfully included an annexe that traces the evolution of credit information sharing (CIS) back to 2010, when the mechanism was first launched. It explains that credit information sharing has been part of a continuing effort to lower the cost of credit.

CIS started with sharing of negative information by licensed banks. This went on until 2013. Obviously, you cannot calculate credit scores from only negative information, and for the first four years the only useful data points available were whether someone was listed or not, and for what amount!

Banks would, therefore, tell customers they could not get credit as they were listed by a CRB, and that they should clear the amounts for which they were listed to obtain further credit. In addition, many – perhaps I should say all, lenders, have previously used listing as a collection threat – pay or be listed. Perhaps bank officers feared sharing strategic information with their competitors, which could be used to lure good customers! 

But things ought to have changed in 2013 when banks started sharing full file information – that is both when you pay and when you default. This meant CRBs could generate credit scores, and the mechanism could be used as intended.

Supervision framework 

In January of the same year, CBK issued risk management guidelines. It followed up with a risk-based supervision framework in May. Customers could now see the full benefit of the mechanism, but bank officers continued to tack bureau reports to their credit decision books, ticking a box in a lending checklist. To use the credit scores, banks needed to develop and implement appropriate decision models.

In the meantime, Kenyans were up in arms over the high cost of credit. Parliament, much to the chagrin of free market adherents, enacted an interest rate cap that became effective in September 2016. The debate had been rather one-sided though, as most political leaders did not want to be seen to openly side with banks.

Matters did not improve much. In early 2018, CBK published a study that found that the number of loan accounts had declined significantly in the nine months after the interest rate cap. Average loan size had increased by 37 per cent, suggesting small borrowers were being left out in preference of larger ones. 

CBK responded with the Banking Sector Charter of March 2019, requiring banks to implement risk-based pricing of loans by using credit scoring techniques in their loan screening models. 

Such models from 23 banks have been approved, but officers still seem hesitant to use the scores in lending. The bankers were not part of the public communication this week, though their chairperson had a presser two weeks ago. Perhaps the regulator, the banks and the bureaus need a common front.

@NdirituMuriithi is an economist