Banks face fines for locking out blacklisted borrowers

Banks, saccos and micro-finance lenders now face a fine of Sh2 million for every defaulter they deny loans to for being listed negatively with the country’s credit reference bureaus (CRBs).

This new regulation represents a fresh attempt to unlock credit to firms and workers hard hit by effects of coronavirus pandemic. The Treasury has introduced the fine in regulations aimed at cleaning up the CRBs blacklist and enhancing borrowers’ chances of being able to borrow more.

Banks and saccos have been reluctant to offer loans to the more than 2.5 million Kenyans that have been negatively listed with the CRBs.

Introduction of penalties to curb the practice of denying defaulters loans comes in a period when the government expects lenders to boost the cash flow of workers and firms battered by the effects of Covid-19 pandemic. Kenya has reported 887 positive cases and 50 deaths.

The virus has triggered job cuts and hit firms’ sales on low demand for their products and services, forcing households and companies to seek loans in their struggle to remain afloat.

“An institution that denies a customer a credit facility or any other financial service solely on the basis of a credit score shall be liable to a monetary penalty of two million shillings or such other sanctions under the Act, the Microfinance Act, 2006, or the Sacco Societies Act, 2008, as the Central Bank may impose,” says Treasury Secretary Ukur Yatani in the new CRB regulations.

Lenders can only reject a loan application due to other factors beyond credit scores earned via CRB listing. They will be expected to inform borrowers by writing about the reasons behind the rejection of their loan application.

Credit reference bureaus were established in 2010 to help banks gauge the risks of lending, which in turn were meant to help lower the cost of credit for consumers. So far, though, they have not done much to reduce rates and instead the CRBs have been used to punish defaulting or blacklisted borrowers.

“The score should not be a basis for you being denied; it should be a basis for banks to be able to price the risk,” said Habil Olaka, CEO of Kenya Bankers Association — the bankers’ lobby group.

“People have been denied a credit facility for being listed with CRBs, which is the kind of abuse they are trying to address. That is why the unregulated digital lenders have been kicked out,” he said.

Under the new rules, the Central Bank of Kenya has stopped unregulated digital mobile lenders from forwarding defaulters’ names to CRBs.

CBK said that disconnecting unregulated digital mobile lenders from CRB was linked to a public outcry over widespread misuse of the credit information sharing (CIS) mechanism.

This means only banks as well as micro financiers and deposit-taking saccos will be allowed to blacklist defaulters, locking out firms like Tala and Branch.

Commercial banks, regulated digital lenders and saccos have also been barred from listing defaulters who borrowed less than Sh1,000 or have been unable to clear balances that are less than the set amount.

Data from Kenya’s three CRBs — Metropol, TransUnion and Creditinfo International — shows that the accounts that were negatively listed had jumped from 2.7 million last year to 3.2 million in March. About a million of them were mostly linked to mobile digital loans of less than Sh1,000.

Non-performing loans in the banking industry rose to 12 percent last year, from 9.5 percent in 2017, CBK data shows, remaining in double digits for the first time since 2007.

This has triggered property seizures by banks and an increase in the number of defaulters reported to CRBs, hurting the borrowers’ chances of being able to borrow more.

Banks have in recent years increased the use of CRB reports for loan application reviews. In 2018, banks requested for 12.4 million reports from CRBs, up from 4.3 million in 2017and 1.6 million in 2014.

Kenya has also suspended CRB listing for loans that were defaulted from April 1 to cushion distressed businesses and families from the effects of coronavirus, which has hit consumer demand and forced businesses to shed jobs and cut back their operations.

Official data shows that loan defaults increased 55.6 percent in the three years to December, hitting Sh333.3 billion or 12 percent of Sh2.77 million loans advanced.

Bad loans as a share of total credit advanced stood at 5.6 percent and 6.8 percent in 2014 and 2015 respectively, a pointer to the bankers’ deteriorating loan book

This emerged in a period when Kenya’s struggling economy has resulted in job cuts and near stagnant wages, leaving thousands of people in a debt trap.

Thousands of workers have taken out loans worth billions of shillings, mostly without collateral, for short-term needs like buying furniture, vehicles and urgent family expenses like healthcare.

Default rates are expected to jump in the wake of the pandemic that has hit consumer demand and forced businesses to shed jobs, slash salaries and cut back their operations.