The Central Bank of Kenya (CBK) has turned the heat on banks and mortgage companies over controversial consumer credit scores amid rising complaints by thousands of borrowers locked out of funding.
The financial sector regulator says many lenders have failed to comply with credit information sharing (CIS) regulations, which were launched in 2010 to help limit bad loans.
Over the past 12 years, the CIS mechanism has become an integral part of the credit market in the country with official data by the CBK showing that as of September 30, 2022, over 160 million credit reports had been accessed by commercial banks, deposit-taking saccos, third-party data providers and individuals as well as micro-financiers.
On average, more than three million reports are requested from the three licensed Credit Reference Bureaus (CRBs).
The success of the CIS scheme saw the creation of regulations in 2020 to buttress credit-risk-based pricing whereby lenders would among other factors consider a customer’s credit score when appraising loan applications.
An audit by CBK, however, revealed that many lenders have ignored the rules resulting in unfair treatment of borrowers.
“Many lending institutions are yet to effectively use borrowers' credit scores in their credit risk pricing. Additionally, there are concerns that institutions are mainly using adverse credit reports to deny customers’ credit” Matu Mugo, the deputy director in charge of bank supervision said in a November 10, 2022, circular to chief executives of banks, mortgage companies, and micro-finance banks.
“As you are aware, the CIS mechanism was intended to be a risk management tool to appropriately price credit risk and more broadly, enhance access to credit by Kenyans,” he said.
The official said CBK had noted several anomalies in the CIS arrangement including high rejection rates of data submitted to CRBs due to erroneous formats or missing mandatory fields, submission of incorrect or incomplete data, and institutions sharing varied data to the three CRBs.
The regulator also flagged non-sharing of data with all three licensed CRBs, late submission of information by bureaus, failure to advise customers before an adverse listing, delayed updating of customers’ credit score, an incorrect listing of borrowers and failure of institutions to promptly addresses complaints reported to them.
“CBK reiterates that data integrity is imperative for the functioning of the CIS mechanism. Accordingly, institutions should regularly review credit data reported to CRBs and adopt effective quality control systems and processes,” said Mr Mugo.
This comes as the regulator initiated fresh steps to curb the abuse of blacklists. Last week it said it was in talks with banks and bureaus to review the credit information framework amid some persistent concerns by borrowers unfairly blocked from accessing loans.
“This relates largely to the use of adverse credit reports issued by credit reference bureaus, which are being used to deny borrowers credit,” said the apex bank.
In a bid to curb abuse of listings, the CBK said it had mandated all CRBs to include a standard statement at the top of every credit report indicating that a customer’s credit score “should not be used as the sole reason by a lender to deny a customer a loan”.
“Further, CBK is working with CRBs to improve the quality of credit reports, and in particular, enhance the robustness of their credit scoring models and align them to best practices,” CBK said.
The regulator said it was also working with banks on credit-risk pricing to limit the unfair treatment of borrowers.
“In this context, banks are required to consider the credit score of a borrower in addition to the other factors in making a lending decision. This approach would allow borrowers and especially micro, small, and medium-sized enterprises to access appropriately priced credit,” said CBK.
The regulator, however, urged borrowers to honour their repayment obligations on their debt to avoid tussles with creditors.
Good credit history
“This will enable them to build a good credit history based on their payment behaviour and thereby obtain loans at better rates,” it said.
Over four million loan defaulters will be removed from CRB blacklists under plans mooted by President William Ruto to reform the country’s credit market.
The President in September directed the CBK to abolish the blacklisting of borrowers and instead have a scoring system where defaulters will get a low grade instead of being shut out of the financial system.
President Ruto said the government supports credit-sharing mechanism but wants a system where borrowers can be graduated from the least to the best, which will then allow lenders to appropriately price their loans based on risk profile.
Borrowers reported to one of Kenya’s three credit bureaus have their chances of accessing new credit severely limited as lenders tend to shun them altogether when they apply for loans, in what is known as a negative listing.