Failure to pay electricity, water and telephone bills could now land Kenyans on the list of defaulters at the credit reference bureau and deny them access to loans.
The noose is tightening on bad debtors, with settling of Sacco loans now also added to factors — which will from January 2017 be used to determine a borrower’s creditworthiness.
The Finance Act 2016, which was signed into law two weeks ago by President Uhuru Kenyatta amends the Banking Act to allow power, water and telecommunications firms to refer defaulters to credit reference bureaus.
The Act gazetted last week also allows lenders, the utility firms and credit reference bureaus to share borrower information with their counterparts in the East African region.
The law intends to broaden the basis for establishing the risks related to a borrower’s character which would raise the red flag to lenders and suppliers of other goods and services on credit.
Metropol Credit Reference Bureau (CRB) managing director Sam Omukoko said expanding credit information sharing to Saccos and utility companies would enhance the Bureaus measurement of the borrowers’ risk profiles.
“Collecting credit information from Saccos and utility companies will now increase the visibility of the customers since we will be able to collect data from various sources which also enhances our measurement of risk profiles. The more we see what a customer is doing the more we can predict his or her action tomorrow,” said Mr Omukoko.
Ideally, the riskier borrower should procure the services at a premium interest rate but under a practice adopted by the financial sector, defaulters are being denied facilities until they settle outstanding debts or reach fresh repayment terms with the respective creditor.
Already the Nairobi City Water and Sewerage Company has warned customers of immediate disconnection without further notice as soon as a bill falls into arrears.
“Please pay now to avoid the disruption of your services and your name being shared with the Credit Reference Bureau,” the notice sent via SMS to individual customers states.
The use of utility bills in determining credit worthiness is expected to lessen the collection burden on suppliers, obligates customers to settle bills promptly and creates a new income stream for credit reference services who charge Ksh100 ($1) for each report issued.
According to Kenya Power chief executive Dr Ben Chumo the new law is significant in debt management particularly to post-paid customers. “This is very important for debt management particularly with post-paid metering but most of our customers are increasingly on prepaid metering,” he said.
However, the law also means that utility companies especially in the water and electricity sector will have to invest more in robust systems to minimise disputes arising from erroneous billing and wrong referencing to CRBs for which customers can sue for damages.
Even before the Finance Act comes into force next year, Saccos have out of prudence been getting credit records of their members from CRBs and using them to deny facilities to borrowers with bad habits. The Higher Education Loans Board has also been referring defaulters to CRBs.
“This law will deter serial defaulters. Non-performance loans are not so significant in Saccos but we don’t want situations where defaulters from other financial institutions come to take loans from Saccos. We believe this will lead to reduction of non-performing loans in Saccos,” said George Ototo, the chief executive of the Kenya Union of Savings and Credit Co-operatives.
Initially, the law only allowed commercial banks and deposit-taking microfinance institutions and the Higher Education Loans Board to share credit information on borrowers.
While allowing sharing of credit information across borders by regulators, credit reference bureaus and other institutions performing similar roles, a mutual legal framework will have to be in place and the information can only be used for discharge of an institution’s mandate. This suggests that it cannot be passed on to third parties outside the loop that will be prescribed.
Kenya introduced the sharing of credit information on borrowers following concerted consultations between the Central bank and commercial banks in 2009.
The move is aimed at helping banks control the growing number of bad debts that led to the collapse of several lenders at the turn of the century. Since then, Kenya, has licensed three bureaus (CRB Africa, Metropol CRB Ltd and Creditinfo) while Tanzania has two registered bureaus, which are privately owned (Dun & Bradstreet Credit Bureau Tanzania Ltd and Creditinfo Tanzania).
Rwanda has registered one bureau — CRBAfrica Rwanda— while Uganda has two; Compuscan Uganda and Metropol East Africa Ltd.
Sharing of credit information among agencies in the region is expected to discourage high-risk borrowers and defaulters from extending their risks across borders.
The implementation of credit information sharing across the region is being pursued by the Monetary Affairs Committee of the East African Community as part of the harmonisation of regional supervisory frameworks.
In other changes brought by Kenya’s Finance Act 2016, the government will start paying taxpayers interest on tax refunds that are not paid within two years at the rate of one per cent per month.
This will go a long way in solving cash flow hitches that companies go through when the refunds are delayed. Businesses have also been allowed to file claims within five years of incurring the cost, up from one year.
“The law is very important particularly for exporters who have had significant amounts of unpaid VAT for a while. When refunds are not received on a timely basis business has to borrow at high rates,” said Nikhil Hira, a tax partner at Deloitte & Touche East Africa. On the flipside, businesses will pay the same interest rates on erroneous refunds not reimbursed within 30 days of KRA notifying them.
“We have been pushing for VAT refunds and recommended that there should be a reciprocal relationship. So this is very exciting news,” said Kenya Private Sector Alliance chief executive Carole Kariuki.
Ms Kariuki said release of the refunds had improved this year, sparing companies expensive bank overdrafts for funding operations.
The National Treasury said outstanding value added tax refunds stood at Ksh7.2 billion ($72 million) as at May 2016. Although the exposure had been put at Ksh30 billion ($300 million) last year, Treasury Principal Secretary Kamau Thugge said half of the claims Ksh14.9 billion ($149 million) were found to be fraudulent.
The Act now also allows KRA to appoint agents to collect withholding tax which has been increased from five per cent to six per cent. Unpaid VAT refunds have been a perennial headache for KRA which had at one time considered securitising the arrears into a bond that would be traded at the Nairobi Securities Exchange.