The Reforms initiated to improve the Credit Reference Bureau (CRB) Framework are a step in the right direction towards increasing credit access
The Central Bank of Kenya announced that it had updated the Credit Information Sharing Framework in November 2022, which mandated the Credit Reference Bureaus (CRBs) not to use negative credit scores as the only reason to deny credit, and recommended the fast implementation of the risk based pricing model by commercial banks. Additionally, the CBK announced the rollout of the Credit Repair Framework in November 2022, which waived off 50.0% of non-performing mobile phone digital loans by commercial banks, microfinance banks and mortgage finance companies outstanding at the end of October 2022 for six months, up to end of May 2023. Despite the new reforms, we note that the Kenya’s CRB Framework has more strides to cover to increase credit access to the country and also reduce the Non-performing loans (NPLs) ratio in the lending industry. Below is the summary of the Kenya’s CRB framework and areas to be considered to improve it;
- Credit risk in Kenya
Credit risk has remained elevated in Kenya especially post COVID-19, evidenced by the increase of gross NPLs to gross loans ratio to 14.7% in the Q2’2022, from 14.0% in Q1’2022, which is despite the reforms enacted by the CBK to update the CRB framework. Below is a graph showing the NPL ratio over the last 10 years;
Source: Cytonn Report
However, according to the World Bank, Kenya’s risk premium on lending, which reflects the overall country’s confidence on its lending sector, has declined to 5.1% in 2021 from 5.5% recorded in 2019, an indication of increasing confidence in the country’s credit sector, due to the measures the CBK has taken to make the sector more efficient. The graph below shows the Kenya’s risk premium on lending for the last 10 years;
Source: World Bank
- CRB Framework in Kenya
The first CRB regulations were published in 2013 which allowed CRBs to share both positive and negative information to lenders, In April 2020, the CBK amended and published the CRB regulations 2013, adopting the current CRB regulations 2020. Notably, in a major change from the 2013 CRB regulations, in the new regulations, the CBK mandated that;
- Default of amounts less than Kshs 1000.0 would not be submitted to the CRBs, and the borrowers that were blacklisted for defaulting of the loans less than Kshs 1000.0 would be then delisted,
- Saving and Credit Cooperatives (SACCOs) would be included as authorised subscribers of CRBs, and would then submit borrower’s information to the CRBs and would also receive reports from the CRBs, and,
- CRBs would process first time applications of the Certificate of Clearance (CoC) at no cost.
Additionally, in 2020, the CBK announced that;
- It had stopped the approvals given to the digital (mobile-based) and credit-only lenders as third party credit information providers to the CRBs, due to public complaints regarding the misuse of information by such parties, and,
- It would suspend the listing of negative credit information from borrowers for six months from the beginning of April 2020 on the loans that were performing but had become non-performing on the date of commencement of the policy, and as such, the loans that fall in arears in the six months would not lead to blacklisting of the borrowers.
- Developments on the 2020 regulations
The government through the CBK has been updating the 2020 CRB regulations as follows;
- In November 2021, the CBK suspended for twelve months from the beginning of October 2021, the listing of negative credit information for borrowers with loans less than Kshs 5.0 mn, which were performing earlier and had becoming non-performing from the beginning of the suspension period.
- Additionally, the CBK released in November 2022 an update on the Credit Information Sharing(CIS) Framework and mandated all existing CRBs to include that the credit score of a customer should be used as the sole reason to impede access to borrowing, and as such, the CBK noted that it was working with the CRBs to improve the scoring models thus improving the quality of the credit scores,
- In the same update the CBK noted that it is supporting the banks with the implementation of the risk based credit pricing. If fully implemented, it would grant the already blacklisted borrowers access to credit at a higher cost, while at the same time getting access to credit. As of September 2022, 22 out of the 38 commercial banks had received approval to proceed and adopt the model., and,
- The CBK released the Credit Repair Framework on 14th November 2022, announcing that institutions such as Commercial banks, microfinance banks and mortgage finance companies will provide a discount of 50.0% of the non-performing mobile digital loans offered for a repayment period of 30 days or less, and therefore update the credit standing of such borrowers from non-performing to performing for the period up to 31st May 2023.
- Areas of Improvement to enhance the CRB Framework
- Adopt the risk based pricing model to the digital credit providers-The risk based pricing model is only being implemented to banks. The various digital credit providers will still continue using the credit rating to grant credit, which will deny access to the current negatively listed borrowers,
- Reduction of costs of obtaining a credit report and clearance certificate- Although the current 2020 CRB regulations abolished the charges to obtain a Certificate of Clearance from a CRB for first time applicants, the certificate obtained is only valid on the date of issue. This means further costs would be incurred for the subsequent certificates, which is expensive,
- Increase the number of CRBs in Kenya - Kenya’s Credit reference sector is underserved, and the CBK should make it easier for new entrants by removing the various regulatory barriers, which would spur competition and innovation of better credit rating models,
- Borrower education- The Central Bank as the sole regulator of CRBs should make it a priority to educate borrowers on the importance of having a positive credit score and debt management techniques, and this would spur growth in the borrowing sector,
- Lending rates ceiling- In addition to the introduction of the Risk Based pricing model to the banking sector, the CBK should introduce the ceiling of lending interest rate ceiling to prevent predatory lending to the high risky borrowers, who will be charged higher interest rates, and,
- Inclusion of other credit predictors in credit scoring- Loan repayment patterns have been used to determine a borrower’s creditworthiness in Kenya. However, the credit scoring system should also include other predictors such as a borrower’s utilities bill payments and non-traditional data like digital footprints as done in advanced economies, in order to make the credit scoring system more robust.
For more information, kindly see our topical on Kenya’s Credit Reference Bureau (CRB) Framework
