What you need to know:
- Sharing credit information is often misconstrued as a method by which banks deny individuals access to loans by consigning them to a “blacklist’’.
- A functional credit information sharing mechanism complements the objectives of the risk-based pricing mechanism.
- As of December 2021, the rate on non-performing loans stood at 13 per cent. This means that of 100 borrowers, only 13 are likely to default.
The role of the credit information sharing mechanism has been among the top discussions in the country over the past week.
This discourse is important, especially because it comes at a time when players in the credit market are being encouraged to make more efforts towards facilitating further access to affordable credit for businesses and individuals in the economy.
Interrogating the mechanism is also instructive because one of the main challenges concerning credit data sharing in the Kenyan market regards low awareness of how the process works, its purpose and how it benefits both borrowers and lenders.
Sharing credit information is often misconstrued as a method by which banks deny individuals access to loans by consigning them to a “blacklist’’.
It is, however, meant to address information barriers between potential and actual borrowers in the economy.
This makes bank loan assessment processes fair and individualised, eliminating generalised perceptions based on unknown risk profiles of borrowers.
The credit information sharing framework involves the exchange of information concerning the borrowing history of individuals, enabling banks to enhance risk assessment.
Meanwhile, it also offers borrowers opportunities to access credit at better rates.
It is possible, for instance, for a borrower to use their credit history report to negotiate for a lower interest rate on a loan on the basis that their loan history record shows they meet their loan obligations.
A borrower can also negotiate for better terms, for example, on collateral cover requirements on the basis of the credit history report.
On the flip side, the unavailability of information on individuals’ borrowing behaviour can lead banks to avoid lending due to the lack of a basis upon which to measure default risks.
The other recourse a bank would have in the absence of credit history information is to provide credit at high-interest rates to mitigate the default risk.
When the credit information sharing mechanism was introduced, banks were mandated to only share negative information. This meant that everyone in banks’ CRB reports was a defaulter.
Although banks were later required to share both positive and negative information, the data-sharing framework had already come to be associated with a negative perception.
Beyond mending information gaps between borrowers and lenders, the mechanism is an invaluable contributor to stability in the financial system.
Before the advent of the credit information sharing mechanism, there were substantial challenges in the financial system, largely due to poor loan assessment and collateral evaluation, all of which led to massive credit defaults.
The mechanism continues to contribute to the stability of the financial system, addressing the high costs of data collection by individual banks.
Globally, the US subprime mortgage crisis that ensued from 2007 to 2009 was associated with analysis and pricing issues.
A functional credit information sharing mechanism complements the objectives of the risk-based pricing mechanism, expanding access to affordable loans through the participation of the borrower, and understanding that credit history has a bearing on both access and pricing of loan services.
The discussion on the credit information mechanism is timely as it sets the stage for discussions on how it can be leveraged upon to benefit borrowers.
For me, the best way to tap into the mechanism is through awareness creation, particularly on the benefits of the system.
This will in turn empower prospective borrowers to leverage the mechanism to access further credit for business or individual use.
Currently, the overriding concern in the economy consists in how to enable the banking public to access affordable credit.
In these efforts, innovation will be critical. It will also be important to utilise data further in banking decisions, informing loan appraisal processes, addressing customer satisfaction strategies, and designing loans that meet individual needs.
Sustainable credit appraisal processes should also use data extensively.
As of December 2021, the rate on non-performing loans stood at 13 per cent. This means that of 100 borrowers, only 13 are likely to default.
Put differently, out of 100 borrowers, 87 are likely to meet their obligations. The perception of a ‘blacklist’ would only affect 13 per cent.
This does not mean that they are locked out of the credit market but that the credit provider has got better information to help in the assessment of the credit, which includes the pricing.
The other 87 per cent would greatly benefit from the mechanism by using their credit profiles to not only access credit but be able to negotiate better terms and pricing for their credit facility.
Based on this equivalence, Kenyans are largely good borrowers and are therefore in a position to benefit further from the credit information sharing mechanism.
Dr Habil Olaka is the Chief Executive Officer of the Kenya Bankers Association. Sunny Bindra’s column resumes next week