Constrained access to credit information complicating pricing of risk-based loans 

Old currency notes

Tellers at the Moi Avenue branch of the Kenya Commercial Bank with the old and new Sh1,000 denomination notes on September 30, 2019.

Photo credit: Diana Ngila | Nation Media Group

What you need to know:

  • One of the four pillars of the Kenya Banking Sector Charter is transition to a risk-based credit pricing framework. 
  • The adoption of risk-based pricing has the potential to alter the behaviour of borrowers, significantly creating an awareness.

The delivery of banking services has over the past decade grown to be more dependent on market information and data to drive its efficiency-enhancing innovations and support credit scoring mechanisms.

This has been supported by enhanced access to market and customer-related data, enabled by credit information-sharing mechanisms. At the core of all these developments has been the need to bolster efficient and inclusive credit allocation to support economic growth.

One of the four pillars of the Kenya Banking Sector Charter, which the industry signed into in 2019, is transition to a risk-based credit pricing framework. 

The transition would confer benefits to borrowers and lenders alike, via two key avenues. First, it supports lenders to effectively price their loans in line with a borrower’s risk profile. 

A borrower’s risk profile improves with sufficient information on their credit history, which a borrower can also use as a form of collateral to negotiate for lower loan rates.

This helps optimise intermediation and reduce unfavourable credit rationing with respect to some segments of the economy that are perceived as highly risky.

Second, the adoption of risk-based pricing has the potential to alter the behaviour of borrowers, significantly creating an awareness among regarding the benefits and need to invest in creating good credit risk profiles and entrenching a culture of maintaining consistent loan repayment plans.

Despite these benefits, the effectiveness of this pricing strategy is underpinned by availability of information about a customer. 

One of the most supportive developments that had significantly reduced information asymmetry in the industry has been the enhancement of the role of the credit information-sharing mechanism. 

Sector asset base

However, the recent suspension of listing of negative credit information undermines the implementation of risk-based pricing, and thus risks hampering credit growth to segments that may be perceived as riskier.

On the ground, the rollout and adoption of risk-based pricing frameworks, while in progress and commendable, remains low. 

As of end March 2022, six banks had received approvals with regard to their risk-based pricing models. 

These banks, based on the recently published 2021 audited financials, hold only 18.4 per cent of the banking industry’s gross private sector loans. 

The six account for 20.7 per cent of the total banking sector asset base. 

Given this background, we acknowledge that the better part of the journey remains uncovered, long before the industry realises a system-wide implementation of risk-based pricing with its attendant benefits.

The journey has not been without snags. 

The suspension of listing of negative credit information in late 2021 dealt a blow to the gains that had been made over time on credit information sharing platforms, and by extension the implementation of risk-based pricing frameworks. 

The implementation of the suspension continues to constrain bank customer credit assessment, thus limiting the extent to which banks can accommodate customers’ loan requests for lack of adequate information.

Economic growth 

As a result of these developments, private sector credit growth has failed to reach the double-digit level required to support stronger and sustainable economic growth. 

This is against the expectations that followed the repeal of the interest rates capping law in November 2019. 

Shoring up credit to the private sector requires a regulatory environment that can enable faster transition towards implementation of the risk-based pricing frameworks, and staying away from counter-productive measures that disrupt credit information-sharing mechanisms. 

In the past, the credit information sharing mechanism – popularly associated with listing at the Credit Reference Bureaus – has been perceived negatively as a hindrance to access to finances for those with defaulted commitments. 

In reality, however, it presents real benefits to the well-intentioned customers seeking to establish long-term lending relationships with banks.

The development and entrenchment of credit information-sharing platforms has elsewhere been actively pursued to anchor credit market developments. 

Despite the recent disruption – caused by the suspension of listing of negative information – there is an opportunity to revamp the mechanisms and expand their role and utilisation to levels comparable with and even beyond what other countries in the region, such as South Africa, Namibia, and Botswana, have achieved.

According to the latest available data from the World Bank, the private credit information bureau coverage of the adult population in Kenya stands at 36.4 per cent, way lower than South Africa’s 66.5 per cent, Namibia’s 62.7 per cent and Botswana’s 54.4 per cent. 

While there is a risk of the gaps between Kenya and these comparator countries widening through a prolonged suspension of listing, the call to lift the suspension, coupled with more financial literacy initiatives, can energise the credit information sharing mechanism to support credit access and ultimately economic growth in the country.

Dr Olaka is the CEO of Kenya Bankers Association