The government is overhauling the credit rating system to increase access to credit to all Kenyans and enable them build a good credit history based on their payment behavior allowing them to obtain loans at better rates.

The move has compelled the Central Bank of Kenya (CBK) to update the Credit Information Sharing Framework which mandates the Credit Reference Bureaus (CRBs) not to use negative credit scores as the only reason to deny credit, and has recommended the fast implementation of the risk based pricing model by commercial banks.

At the same time, the regulator has also rolled out the Credit Repair Framework which waives off 50 percent of non-performing mobile phone digital loans by commercial banks and mortgage finance companies outstanding as at the end of October 2022 for six months, up to end of May 2023. This will hand relief to at least 4.2 million Kenyans following a directive to lenders to discount approximately Kshs30 billion, equivalent to 0.8 percent of the gross banking sector loan portfolio of Kshs3.6 trillion as at end of October 2022.

“Upon expiry of the framework, the credit standing of the borrowers with respect to these loans will depend on their repayment performance during the six-month period,” CBK stated.

The CRBs perform the credit risk rating for borrowers thus helping financial institutions such as banks, microfinance institutions and digital credit providers to reduce non-performing loans. They are licensed by CBK to collect, compile and analyze a borrower’s credit history, and the information is shared at the request of financial institutions to gauge the credit worthiness of borrowers.

“The framework will cover loans with a repayment period of 30 days or less and were offered by these institutions through mobile phones,” the statement added.

The borrowers covered in the framework are mainly in the personal and micro-enterprises sectors and were adversely impacted by the COVID-19 pandemic. “Their lives and livelihoods were severely impacted by the pandemic through inter-alia loss of employment and closure of their micro-enterprises. The adverse effects of the pandemic continue to linger for the covered borrowers. Accordingly, the framework is expected to enable this segment of borrowers to access credit and other financial services as they rebuild their lives and livelihoods,” the CBK statement concluded.

Currently, there are three CRBs operating in Kenya – Credit Reference Bureau Africa Limited trading as TransUnion Africa, Metropol Credit Reference Bureau, and CreditInfo Credit Reference Bureau.  

The CRBs assign a borrower a scale that is used to show the creditworthiness of the individual. The rating ranges from 200 – 900, with a score below 400 showing a borrower is a defaulter, and therefore a high default risk is attached to the borrower. On the other hand, a score of 800 – 900 indicates that a borrower has a high rating and that, creditors are confident for a repayment. A good credit score improves the chances of a borrower getting a loan, a mortgage or any other form of financing from lenders.

Factors that affect one’s credit score include; commitment of payment of past loans, type and number of credit accounts that one holds, total debt outstanding, an event of filing for bankruptcy and any inquiries made from one’s credit report.

As a borrower there are several benefits which one can obtain from CRBs. They include; low risk borrowers receive better terms and repay loans at lower interest rates as compared to high risk borrowers, and therefore, they receive leverage to negotiate for good credit terms. Also, by being aware that a default will lead to poor credit rating, a borrower is committed to service the loans, and this goes hand in hand to improve the credit score, and, although the cost to obtain Certificate of Clearance (CoC) are considerably high, it reduces the charges of rating a borrower since the information is available from the different CRBs.

However, there are disadvantages to the borrower and they include; blacklisting of defaulters has denied many the ability to access credit, and leaves them open to exploitation by many middlepersons who charge exorbitant interest rates on borrowing. There is also credit repayment bias, as this model only uses one’s credit repayment history, and does not consider other loans aspects, therefore denying the many blacklisted borrowers access to credit, and the fees charged to access CoC (Kshs2,200) is high and this acts as a hindrance for majority of Kenyans to get clearance.

In light of the ongoing credit sector reforms, financial analysts from Cytonn Investments note that in order to enhance effectiveness of the framework and consequently boost access to credit to all Kenyans, there is need to adopt the risk-based pricing model to the digital credit providers, since, 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.”

Although the current 2020 CRB regulations abolished the charges to obtain a CoC 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.

Analysts further recommend that CBK should make it easier for new entrants (CRBs) in the credit reference sector to spur competition and innovation of better credit rating models.

The CBK as the sole regulator of CRBs is being challenged to 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.

And in addition to the introduction of the risk- based pricing model to the banking sector, the CBK should introduce the lending interest rate ceiling to prevent predatory lending to the high risky borrowers, who will be charged higher interest rates.

Finally, the analysts recommend the need for 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.”