Central Bank of Kenya Issues Warning Over Bogus Credit Scores

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By Tonny Ingutia

In response to growing complaints from thousands of borrowers who are unable to obtain funding, the Central Bank of Kenya (CBK) is turning the heat on banks and mortgage companies over controversial consumer credit scores.

CIS regulations were launched by the financial sector regulator in 2010 to reduce substandard loans. However, many lenders have not complied with them.

A significant portion of the country’s credit market is derived from the CIS. According to official data released by the CBK, more than 160 million credit reports had been accessed by banks, deposit-taking saccos, third-party data providers, individuals, and microfinancers as of September 30, 2022.

Each year, the three licensed Credit Reference Bureaus (CRBs) receive more than three million requests for reports.

The success of the CIS scheme saw the creation of regulations in 2020 to buttress credit-risk-based pricing whereby lenders would among other factors consider a customer’s credit score when appraising loan applications

Disregarded rules

However, a CBK audit revealed that many lenders ignored the rules, resulting in unfair treatment of borrowers.

“Many lending institutions have yet to use borrowers’ credit scores effectively in credit risk pricing.” Furthermore, there are concerns that institutions are primarily using adverse credit reports to deny customers’ credit,” Matu Mugo, the deputy director in charge of bank supervision, said in a circular to chief executives of banks, mortgage companies, and micro-finance banks dated November 10, 2022.

“As you are aware, the CIS mechanism was designed to be a risk management tool to appropriately price credit risk and, more broadly, to improve Kenyans’ access to credit,” he explained.

Non-data exchange

The regulator also cited non-sharing of data with all three licensed CRBs, late submission of information by bureaus, failure to notify customers prior to an adverse listing, delayed updating of customers’ credit scores, incorrect listing of borrowers, and institutions’ failure to promptly address complaints reported to them.

“CBK reiterates that data integrity is critical for the CIS mechanism to function.” As a result, institutions should review credit data reported to CRBs on a regular basis and implement effective quality control systems and processes,” Mr Mugo stated.

This comes as the regulator took new steps to combat blacklist abuse. It announced last week that it was in talks with banks and credit bureaus to review the credit information framework, citing persistent concerns from borrowers who were unfairly barred from accessing credit.

This comes as the regulator takes new steps to combat the misuse of blacklists. It announced last week that it was in talks with banks and credit bureaus to review the credit information framework, citing persistent concerns from borrowers who have been unfairly denied loans.

“This is largely due to the use of adverse credit reports issued by credit reference bureaus, which are being used to deny borrowers credit,” the apex bank stated.

An excellent credit history

Under President William Ruto’s plans to reform the country’s credit market, over four million loan defaulters will be removed from CRB blacklists.

In September, the President directed the CBK to discontinue the blacklisting of borrowers in favor of a scoring system in which defaulters would receive a low grade rather than being barred from the financial system.

President Ruto stated that the government supports credit-sharing mechanisms but would prefer a system in which borrowers are graduated from the worst to the best, allowing lenders to appropriately price their loans based on risk profile.

Borrowers who have been reported to one of Kenya’s three credit bureaus have severely limited access to new credit, as lenders tend to avoid them entirely when they apply for it.

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