Kenya is pushing for a reprieve for loan defaulters by reducing by two years, the period credit reference bureaus (CRBs) can hold information about them. This potentially seals loopholes which were exposing banks to expensive court battles.
Fresh regulations published last week are seeking to cut this period from seven to five years while also requiring banks to give bad borrowers a one month notice before listing them.
This means that after the fifth year, the report of a previous defaulter will not reflect the bad borrowing history, giving them a chance to improve their credit rating and thereby access bank loans. This will put Kenya at par with its East African partners who also have a five- year expiry period.
However, where the borrower is declared bankrupt the information will be held for seven years. In Kenya a debt is legally enforceable after default for a period of six years.
Kenyan banks have been accused of using negative reports as a threat to those falling behind their repayment schedules while declining loan applications of those listed, locking them out of credit access.
Concerns have been growing over the accuracy, effectiveness and efficiency of the credit referencing system, an issue that is increasingly becoming a political hot-potato.
Aspirants seeking political office are, for example, expected to obtain certificates that confirm their creditworthiness under the requirements of the Leadership and Integrity Act 2012 on financial obligations.
Two weeks ago, a section of MPs sought to have credit reference bureaus stopped from undertaking any vetting on aspirants seeking various posts in the coming elections. They argued that the clearance being undertaken to ascertain whether candidates have defaulted on their loans is illegal as the requirement was deleted from the vetting regulations.
The changes are part of proposed guidelines released by the Central Bank for public review up to mid next month and they are aimed at responding to the challenges faced since the introduction of credit bureaus two years ago.
Kenya established a credit referencing system early 2010 aiming to manage the high rate of loans defaults in its banking system that only escalated in the past two years of economic slowdown.
High default risk
Commercial banks have pointed out high default risk as part of the reason interest rates in the personal loans market remain high at more than 15 per cent despite the recent decline in the benchmark Central Bank Rate (CBR) and the low inflation.
Bankers said defaults were one of the biggest threat to profitability this year.
CBK’s proposal that banks give notice of intentions to list a defaulter is intended to help the banking fraternity side-step legal challenges which it has been facing. Several complainants have moved to court questioning the authenticity of data held by CRBs.
CRBs have been challenged in court for holding incorrect information leading to potential borrowers being denied loans.
In their fillings the plaintiffs have pointed out that they were not informed of their listing, that the information was inaccurate and even when they had paid the details were not updated.
In July for example, Eddie Ndeto Gitetu sued Kenya Commercial Bank for allegedly submitting his name to the Credit Reference Bureau Africa (CRBA) as a bad debtor when he had no outstanding loan.
Mr Gitetu claimed he was operating a dollar account with KCB when his name was submitted to CRBA in April as a bad debtor.
The trader is asking the court to compel the bank to pay him general damages and interest at 30 per cent per annum since the bank’s action embarrassed and defamed him.
A month later, businessman Daniel Gachanja Githaiga sued CRBA over his inclusion in the list of bad borrowers based on inaccurate and forged information.
Mr Githaiga is accusing CRBA — a Central Bank of Kenya-licensed credit reference bureau — of advising Equity Bank to deny him a Ksh10 million ($119,000) loan because of his alleged failure to service an outstanding debt with CFC Stanbic Bank.
“Credit information providers furnishing negative information to a bureau will, in writing issue to the customer a notice of intention to submit the negative information within 30 days prior to submission of the negative information to a Bureau,” reads the proposed guideline.
Previously banks were to notify the defaulter before expiry of 30 days after submission of their details telling them which bureau they had been listed with.
The notice of intention will contain the particulars of the loan, including the original amount, interest rate charged, principal amount paid, interest paid and the outstanding amount including any penalties charged.
“It is anticipating legal challenges. Most people have been saying that they did not know of their listing and the reason; so it is just to allow someone time to react,” said Sam Omukoko, CEO of Metropol Credit Bureau.
It is expected that customer profiling and credit scoring will help borrowers negotiate the terms and conditions of their loans, a move that should help those with high credit scores get favourable terms.
Lenders say borrowers with good credit ratings could benefit from reduced interest rates besides getting waivers on other lending conditions such as collateral requirements while the banks get an additional tool to minimise non-performing loans.
“The need to provide notice is necessary as it removes the idea of wrongful reporting but the other side of the it is where in a genuine case a customer may bring frivolous disputes to delay the whole process. So while we understand the need we also need to seal any loopholes for misuse,” said Habil Olaka, the chief executive at Kenya Bankers Association, the industry lobby.
“The issue of how long has come up several times before and it has been felt to be punitive. The information should be long enough for a credit giver to correctly access the borrower” he added.
The guidelines have also mandated banks to share positive information about their good borrowers which will allow them to bargain for better credit terms across the industry. These include lower interest rates, non-reliance on asset security and a laxed appraisal process.
The regulator also proposes that the credit bureaus be allowed to contract credible businesses to act as their agents in areas where they don’t have offices. The agents will be used to distribute credit reports.
Every person is entitled to one free report about themselves in a year but any other enquiry is charge a fee of Ksh600 ($7) but for banks owing to the bulk of their enquiries they are charged between $2 and $5 depending on the depth of the analysis.
Central Bank has also widened the scope of the banks allowing them to also list guarantors of defaulted loans should they fail to pay up on behalf of the principal borrower.
Implementation of the guidelines is expected to lead to a drop of the credit risk loaded by banks on their base lending rates resulting in cheaper cost of credit.