President William Ruto has committed to drive change in the current Credit Refence Bureau (CRB) framework that has blacklisted thousands of borrowers for defaulting on loans, saying it’s one of the reasons why businesses and individuals can’t access loans.
In his inaugural speech after being sworn in yesterday, President Ruto termed the current framework by CRBs arbitrary and punitive, saying it had blocked many borrowers from accessing credit.
“We shall take measures to drive down the cost of credit. Our starting point is to shift the credit reference bureau framework from its current practice of arbitrary, punitive, all or nothing blacklisting of borrowers that denies borrowers credit,” Dr Ruto stated.
“We will work with CRBs on a new system of credit score ratings that provides borrowers with an opportunity to manage their credit worthiness. This will eliminate the culture of blacklisting,” said the President.
But while President Ruto plans to use the change of credit rating system to open up the credit market, it is not clear how the method will achieve its objective, since the government’s suspension of CRB listing as one of the Covid-19 stimulus measures introduced to cushion borrowers caused lenders to cut back on lending to the market.
A credit score refers to a rating a borrower gets based on how efficient he or she is on repaying loans after borrowing from financial institutions. Those who pay within agreed periods score highly, while those who default are ranked lowly or blacklisted. Lenders rely on the score to make judgements on lending, including denying one a loan or pricing it highly, since it allows information sharing across lending institutions.
While the Central Bank of Kenya allowed banks in the country to implement risk-based lending, where riskier borrowers can obtain loans but at relatively higher interest rates, banks said they were unable to increase lending due to inability to use the credit reporting system.
The lenders said lack of data necessary to accurately estimate a client’s risk profile and know the level of a bank’s exposure limited their ability to lend. This is after the government in September last year announced the moratorium on the negative listing of borrowers with loans below Sh5 million by CRBs for a year.
“Our main concern has been on how to manage the risk profiles of our customers when we are blinded by the lack of additional non-banking data,” said Mr Chiera Waithaka, the chief risk officer at Absa Bank Kenya during the launch of the State of the Banking Industry Report 2022. The government’s suspension of CRB listing for all loans below Sh5 million goes until September 30.
It is not clear how lenders will respond to the new credit reporting system, but likely impacts will be on loan pricing and access to loans. President Ruto said the change is expected to be among factors to drive job creation and lowering the cost of living.
“Financial inclusion and access to credit are critical in addressing the fundamental factors of cost of living, job creation and the people’s well-being,” he said.
