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 bureaus 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 borrowers. “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.
Recently, 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.