CRBs were for cheaper loans but are now instruments of torture.
class="MsoNormalToday, the typical worker living in the Eastlands areas of Nairobi is on the mobile phone constantly, shuffling money from M-Pesa to M-Shwari to KCB M-Pesa and constantly borrowing from platforms such as Tala and Branch if not betting on SportPesa. class="MsoNormalMethinks our banks and the mushrooming fintech mobile money applications are like Shylock in Shakespeare's The Merchant of Venice cashing in on the poverty of our people.
class="MsoNormalThey take advantage of the ubiquity and convenience of the mobile money platforms to saddle citizens with small loans which, on the face of it, appear cheap but, in reality, are very expensive when calculated on a per annum basis. class="MsoNormalIsn't it incredible that some of the mobile money platforms charge interest rates as high as 7.
5 percent per month or 90 percent per annum? class="MsoNormalI was surprised the other day when, during a conversation with a rural-based farm hand, I realised that the modestly educated and lowly paid chap was not only a regular borrower on the mobile money platforms but was aware of entities in this country called CRBs that have the power to lock one out of the credit market. class="MsoNormalIn 2009, Kenya joined the rest of the advanced markets in introducing CRBs.
The intention was to address a major constraint in our credit markets: Information asymmetry. class="MsoNormalSerial defaulters were running amok, borrowing across banks and defaulting at will.
Banks had no way of identifying such defaulters and faced the risk of lending to a borrower who had just defaulted on an advance in the bank next door. The consequence of this was very high interest rates on loans.
class="MsoNormalMAJOR WEAKNESSES class="MsoNormalCRBs were introduced to facilitate the sharing of negative default data, which banks would use for the purpose of making lending decisions. class="MsoNormalWe would gradually graduate to what wonks call "full-file reporting", with banks reporting both defaulters and good payers, eventually ending up with a system of credit scoring, in which banks use positive credit information to price loans.
class="MsoNormalAt this initial stage, we had the option of introducing a centralised CRB hosted within the Central Bank of Kenya or privately owned ones. We opted for the latter.
Ten years later, the model we chose has shown major weaknesses. class="MsoNormalFirst, reporting of negative data remains the focus of CRBs.
Indeed, the CRB system has been reduced to a weapon that banks use to threaten borrowers who default. The idea of using positive data to allow good payers to access fairly priced loans was abandoned.
class="MsoNormalWe seem to have forgotten that the sole purpose of credit referencing was to use the system to price risk by rewarding good payers with lower lending interest rates while punishing serial defaulters with expensive loans. class="MsoNormalIt was not the intention of the framers of the model to introduce a system that would deny citizens access to credit as is the case today.
class="MsoNormalSecondly, our CRB systems are not sensitive to complaints by consumers. class="MsoNormalSMALL AMOUNTS class="MsoNormalWe all know that, at any one time, there are high chances that a good proportion of loans are in respect to facilities that are disputed by consumers, excess of unauthorised charges and errors in account numbers.
class="MsoNormalBut do CRBs recognised these inbuilt weaknesses in banks? class="MsoNormalWe have also seen that a very large majority of the defaulters on the CRB database are for very small amounts. class="MsoNormalAn industry insider once expressed the view to me that CRB databases were clogged with mundane data, most of it small amounts arising from bank charges on dormant accounts.
He opined that the designers of the scheme should have introduced a threshold of amounts below which the CRB system cannot list a person's name. class="MsoNormalYet another weakness is that we have allowed CRB data to be used for many things without a bearing on credit such as vetting political candidates, appointees to state jobs and even interviews for private sector positions.
class="MsoNormalThe latest to join the fray are landlords, who have demanded that rent defaulters be listed by CRBs. class="MsoNormalTen years after the government licensed the first CRB, it is time we revisited the model and debated whether these institutions serve the purpose for which they were established.
class="MsoNormalIt's as if we have totally ignored their legal and sole purpose.