Pyrrhic victory in CRB listing freeze

In 280 BCE, the imperious army of King Pyrrhus of Epirus, part of present day Greece, defeated the Roman Empire during a battle at Heraclea and Asculum a year later.

Although King Pyrrhus emerged victor, his army suffered tremendous casualties that made the triumph feel like a defeat giving birth to the phrase Pyrrhic victory.

If borrowers didn’t know this story, they certainly will over the coming 12 months.

On Wednesday last week, President Kenyatta, deep in his speech during the Mashujaa Day celebrations in Kirinyaga County, ordered lenders to stop listing defaulters of Sh5 million and below on Credit Reference Bureaus (CRBs) to allow them to access credit once more.

Also, the Head of State said names of borrowers owing these amounts who had been fingered over the past year be expunged from the listing to allow them to borrow.

“In that regard, and to further augment the interventions we are making to give the MSMEs reprieve, I further order the National Treasury, in consultation with all stakeholders, to secure the following additional measures to provide further space to the recovery of MSMEs,” President Kenyatta said in a  speech whose highlight was lifting of the curfew that Kenyans have grappled with for more than one and a half year.

The President also ordered banks and other financial institutions to enable restructuring of loans for struggling borrowers.

But even as borrowers celebrated, they would be better served jogging their minds to last year when a similar moratorium between April and September was issued by the Head of State.

Faced with increased risk of defaults as borrowers no longer feared being listed with CRBs, lenders significantly reduced lending to more risky customers while others stopped advancing entirely, dealing a huge blow to borrowers.

Digital Lenders Association of Kenya (DLAK), which represents about 20 mobile lenders, had earlier this year painted the picture of what borrowers could be facing in the coming months.

The association said borrowers who took loans last year during the moratorium on CRBs listing did so with no intention of paying back, forcing the lenders to loan to only the most credit-worthy.

"We stopped lending in March through April and May but we had to make decisions so we wrote off all bad loans. We are currently only lending to the best customers, those who understand that they have to pay," said DLAK chairman Kevin Mutiso. "Most borrowers initially were borrowing with no intention to pay back," he said. At the time, a borrower who spoke to the Nation lamented how he had been turned away by multiple digital lenders who he had been previously relying on for subsistence cash.

Tough lessons

"It is strange no digital lender now seems willing to extend me credit yet I have been borrowing successfully for a long time. I have no idea why my borrowing limit has now been reduced to zero," Mr Humphrey Ashiono told the Nation then.

But speaking to Smart Business on Thursday last week, Mr Mutiso said the situation had changed this time, and that digital lenders will keep lending after taking tough lessons during the first moratorium that hit them where it hurt most.

“The last time we were not prepared but we are very prepared this time to keep lending despite the moratorium. This is because we have identified other ways to identify the best borrowers without relying on information from CRBs,” Mr Mutiso said.

He added that the highest amount the digital lenders give customers is Sh80,000, and serve about seven million clients per month, underlining the increasing role lenders are playing in supplementing cash available to households for daily use.

For lenders, they are caught between a rock and a hard place – keep lending during the moratorium and risk huge defaults, or reduce lending during the period and significantly diminish your interest income.

Last year saw banks register huge defaults especially to loans lent to individuals for household use, giving pointers on where lenders might opt not to put their money over the next year especially on the moratorium.

Central Bank of Kenya

The Central Bank of Kenya’s (CBK) Bank Supervision Annual Report, 2020 shows that banks have 10.8 million accounts of borrowers who were given loans for personal and household use, making up 28 per cent (Sh843.5 billion) of total loans taken.

Borrowers defaulted on Sh70.1 billion of household loans during the year, the second highest only behind loans taken for trade, which was one of the most affected sectors by the pandemic.

Meanwhile, Sh3.05 trillion loaned out by lenders, Sh638 billion (20.9 per cent) was lent to Micro, Small and Medium-sized Enterprises (MSMEs).

This is an increase from Sh414 billion that was lent to these small businesses just three years earlier, underlining the risks exposed to banks should they witness increased loan defaults following the freeze on CRBs listing.

Of the Sh638 billion outstanding MSME loan balance as at December 2020, commercial banks had lent Sh605 billion (95 per cent), while microfinance banks lent Sh33 billion (five per cent).

Kenya Bankers Association (KBA) Chief Executive Habil Olaka could not be reached for comment on bankers’ views on the moratorium, how it will affect the level of their non-performing loans and ultimately lending choices.

[email protected]