Reconsider suspension on listing of CRB borrowers
Tuesday, September 15th, 2020
The suspension on the listing of Credit Referencing Bureau (CRB) borrowers owing less than Sh1,000 is turning out to be detrimental to information quality and could increase a pile of bad debts in future.
CRBs are of great importance to the financial sector anywhere in the world and are meant to aggregate information about borrowers, both positive and negative; and in facilitating leveraged decisions in availing credit to consumers.
While the justification behind denying digital lenders access to CRBs may, on the surface, appear useful, it needs to be re-evaluated to enhance information quality in the county’s lending market.
For months now mobile-based, unregulated digital and credit-only lenders as third-party credit information providers have not been able to submit credit information on borrowers to CRBs whether positive or negative.
This therefore means participants in this market do not have accurate projection of loans advanced to these borrowers.
Lack of this information makes it difficult to approve new credit and/or increase credit limit to allow borrowers meet bigger goals.
This is especially painful to a majority of borrowers who repay loans diligently and in normal circumstances would have been rewarded for their credit behaviour through the continuous upgrade of credit score.
The directive has negatively impacted on lenders’ ability to differentiate between viable and non-viable customers, making it difficult to deploy much needed funds to start-ups, small business owners and day-traders.
Pre-Covid, digital lenders were issuing over Sh50bn worth of credit to around four million customers monthly.
After the directive, number of customers dropped to around 300,000 due to risk aversion.
One of the main reasons for regulating banking business is to mitigate risks of information asymmetry, something the directive is aiding.
It is important to note that any information on performance of debtors, and with regard to low figures of below Sh1,000 or more, is useful in mitigating increase of non-performing loans in the economy.
In all advanced economies, CRB reporting is not limited by loan amounts since good credit behaviour starts with how borrowers repay small loans.
To encourage responsible lending, it should be made obligatory for any lender to check customer’s creditworthiness by pulling credit reports and reporting credit history to CRBs; by developing appropriate scoring models that will not discriminate good customers and by adapting available lending facilities to customer needs.
It’s time for the government to reflect on the remarkable journey of enhancing the national credit history database supported by digital lending platforms and consider reviewing the suspension if it is desirous of supporting financial inclusivity and reducing bad loans using clear credit data points. — The writer is a financial and Risk Management consultant at Marlite Consultants