CRB blacklisting returns amid higher loan defaults

President William Ruto’s campaign gift of six months without negative credit listing comes to an end this month amidst concerns that loan defaults are rising.

Last year, defaulters had their negative listings suspended from their record and credit score until May 31, 2023 under a Central Bank of Kenya (CBK) directive to delist 4.2 million who had been negatively listed on Credit Reference Bureaus (CRBs).

The credit rating freeze comes to an end even as non-performing loans rose to 14 percent of all loans in February up from 13.3 percent in December last year around the time the freeze was put in place.

The CRB list was full of petty defaulters with over half of the 7 million who have fallen back on payments having borrowed very small sums over mobile phones. CBK said the 4.2 million borrowers had failed to pay back Kes30 billion to banks operating digital loans which puts the average loans at Kes7,142 each.

Metropol CEO Sam Omukoko said the typical borrower being rescued probably took a Kes2000 loan and defaulted but since the interests charged are usually high, the figure ballooned to the region of Kes8000. 

Lifting four million hustlers from CRB was a highlight of President Ruto’s first days in office having delivered a major campaign promise. President William Ruto had been keen on fixing CRB as a quick win in delivering his election pledges, promising to end negative listing and to transform the CRB mechanism into a scoring model to determine the cost of credit and not a blacklisting tool.

However as the end of the credit ratings freeze comes to an end it is unclear which way regulations will face given the changes at the helm of the regulator.

Read also: CBK shakes market with high loan rates

CRB ‘reforms’ were one of Dr Patrick Njoroge’s major banking sector campaigns to improve access to credit for users, helping banks price credit right, which he believed would be the most logical way to lower the cost of credit.

But he came up against a banking sector that was not keen on scoring individual borrowers and were using the tool to scare borrowers to pay up; rousing the obvious political backlash to stop the blacklisting.  

Dr Njoroge would fall back to his legal scrubbing activating CRB regulations in 2020 to impose fines on banks and push them towards using customer credit data for pricing loans and not for locking out borrowers.

His campaign exposed deep problems in Kenya’s credit information mechanism including widespread abuse by lenders. In a circular sent to banks CBK blames the lenders for the high cases of erroneous listing and delays in removing borrowers form CRB even after they resume making payments.

The regulator says banks sometimes give the three CRBs TransUnion, Metropol and Credit Info different sets of data for the same borrower and drag their feet in addressing customer complains on wrongful listings.

CBK has warned lenders it will begin fining them for erroneous listing of borrowers at CRBs and impose a Sh2 million penalty for use of the bureaus blacklists to deny customers loans.

“We have noted the following issues require your attention; high rejection rates of data submitted to CRBs due to erroneous formats or missing mandatory fields. Submission of incorrect data, institutions sharing varied data to the three CRBs late submission of data and failure to advise customers before adverse listing on CRBs,” CBK circular reads.

“Delays in updating of customers credit data eg repayments and deletion of erroneous data, incorrect listing and failure of institutions to promptly address complaints reported to them.”

CBK said the circular was to serve as a reminder of requirements of the 2020 CRB regulations and warn them that failure to comply would result in financial penalties.

Over the last 12 years, over 160 million credit reports have been requested from CRBs by individuals and institutions meaning on average three million reports are requested per month a pointer to the use of the mechanism in making lending decisions.

Politicians have often raised concerns about the negative impact of credit listing that has seen Kenya’s presidents overrule the workings of the mechanism. Retired President Uhuru Kenyatta twice froze CRB listing over the last few years at first for six months in April 2020 at the onset of the Covid-19 pandemic and then extending the freeze 2021 to stop listing of defaulters on loans of less than Sh5 million as a measure to cushion borrowers hit hard by Covid 19 economic shocks.

As the President Kenyatta freeze ended, President Ruto imposed his own six month freeze to avoid a return to massive negative listing which is expected to be pronounced due to the long hiatus of President Kenyatta freezes and the surge in loan defaults that stood at 14.2 percent of all bank loans issued by August 2022.

Outgoing CBK Governor Patrick Njoroge has been drumming up support for his 2020 regulations hoping that by punishing banks and encouraging use of the mechanism to price credit, it will satisfy the new administration. But as the governor prepares to exit, there is little he can do even as lobbying to undo some of his punitive regulations over the years begins to take shape. 

Introduced in 2010, the CRB mechanism initially only included banks and would be used to black list borrowers.

In 2013 new reforms were introduced to include microfinance banks in the mechanism and have both negative and positive data on the CRB score.

The changes introduced ten years ago also included getting customer payment history from other sources besides regulated lenders that included utility companies like Kenya Power, trade companies, insurance companies, Non-Deposit Taking SACCOs, and Development Finance Institutions.

But Banks were only requesting for negative blacklist data and so good borrowers were not enjoying the benefits of lower risk profiling while defaulters were locked out of loans.

Mobile digital lenders entered the fray and turned CRB into a loan recovery tool using it to threaten borrowers and listed millions of Kenyans for very small sums of money.

Then employers started demanding for CRB reports adding the costs of getting employment for the country’s jobless youth.

The CRB’s themselves became greedy, charging borrowers for CRB clearance certificates.

Seven years after the 2013 reforms, CBK made new changes through the Banking (Credit Reference Bureau) Regulations, 2020 (the Regulations), which came into force on April 8, 2020 to address the gaps.

Lenders were barred from listing borrowers for loans of less than Sh1000 and provided for first time CRB clearance certificates free of charge. Saccos were also included in the mechanism.

During Covid-19 pandemic further reforms were introduced including kicking out digital credit providers from the mechanism and enforcing the Kes1000 listing limit with a familiar promise to free 4 million borrowers from negative listing.

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