In a bid to prop up the economy as Covid-19 spreads (Kenya now has 225 confirmed cases, 53 recoveries and 10 deaths), the Central Bank of Kenya (CBK) has announced new regulations that will make it harder for credit reference bureaus (CRB) to keep people who default on small loans on their lists.
In Kenya, once a person has been listed on a CRB, the data is retained for five years, making it difficult for them to get credit with any institution (regulated or unregulated) within that period. The change should ease access to credit for Kenyans during the period of Covid-19 pressure; however, we are worried that digital lenders (most of whom deal in micro lending) will now be left out of the credit information supply loop.
With more than 40 digital lenders now active in the country, there have been increasing numbers of people ‘borrowing from Peter to pay Paul’, with clients moving from one lender to another with little visibility of their credit history. This leaves banks with mobile banking platforms open to the risk of lending to borrowers with little capacity to repay.
In response to the new rules, digital lenders have communicated their intention to stop providing instant credit since they will now have to ask for considerably more detail before issuing loans to clients, which will lengthen loan application periods. Banks may be at an advantage to pure digital lenders as they have their own databases of clients' financial information (and credit scores).
All that being said, even with less information available to banks, we still expect mobile loan growth and overall mobile banking transaction growth to deliver strong growth as people are forced to use alternative channels for transactions, given reduced banking hours and lower charges (arising from a government directive).
The banks with the largest mobile phone-based client bases for loans are Equity Group, KCB, NCBA, Co-op Bank and ABSA Kenya. DTB and Stanbic Holdings have yet to create robust mobile lending platforms.
The key changes to the CRB regulations are as follows:
- A minimum threshold of KES1,000 has now been set for negative credit information that is submitted to CRBs by lenders. Thus, defaulters on loans of less than KES1,000 will no longer be listed by the CRBs. This regulation applies to both regulated and unregulated lenders. The bulk of borrowers, especially through mobile lending, take out small loans of KES500-6,000 (US$4.70-56.50). We see this change as negative for the banks with mobile lending products since the change will lead to loss of the bulk of the information they hold on their clients.
- First-time CRB clearance certificates will be provided by CRBs at no charge. This is positive for the population. Charges were previously KES1,200-2,200 (US$11.30-20.70); ie out of reach for most individuals. Banks pay CRB's on a contract basis as they provide banks with a lot more information on clients beyond client clearance.
- Savings and credit co-operative societies (SACCO) will now submit information to CRBs. SACCOs are regulated by the Sacco Societies Regulatory Authority (SASRA) and they have now been included as authorised subscribers of credit data to CRBs. These SACCOs will now submit borrowers’ information to CRBs and also receive credit reports directly from them. This is positive for the banks we cover as it provides further information to lenders in the credit system.
Alongside the new regulations, additional measures include the following:
- The CBK has withdrawn approvals granted to unregulated digital (mobile-based) and credit-only lenders as third-party credit-information providers to CRBs. Thus, unregulated digital and credit-only lenders will no longer submit credit information on their borrowers to CRBs.
- A six-month suspension of negative credit information for borrowers whose loans were performing previously but have become non-performing since 1 April. Consequently, loans that fall in arrears between 1 April and 30 September will not be listed on CRBs.