Top commercial law firm, MMC Africa Law on Monday proposed the establishment of a new standalone Credit Act that will define a designated regulator to oversee credit scoring and information sharing for all credit providers operating in the market regardless of their industry.This comes months after Central Bank of Kenya Governor Patrick Njoroge, during a regional conference on credit information sharing in Nairobi, expressed concern that the differing formulas for reviewing credit scores by the various licensed credit bureaus – Metropol Credit Reference Bureau Limited, CreditInfo Credit Reference Bureau Kenya Limited and Credit Reference Bureau Africa Limited (trading as TransUnion) – was resulting in confusion.
Speaking in Nairobi, Jacqueline Wangui, MMC Africa Law’s Banking and Finance Partner, the announcement by CBK governor on plans to formulate a central server for financial technology firms to facilitate submission of client credit information could potentially spell the end of mobile, online and micro lenders’ woes with high risk loan delinquents and serial defaulters.
“The new model will also address lenders’ apprehensions about credit score consistency across the three main credit bureaus. One other essential safeguard of the proposed credit information central server is to preserve the integrity of credit scoring so that everyone has a number that accurately determines their credit worthiness,” she explained.
Jacqueline however pointed out that the absence of a Credit Act means that some categories of credit providers are not regulated and thus may choose not to actively remit data to the central server.
“This has the potential of undermining the efficacy of the proposed changes. Faced with the challenge, Parliament may elect to legislate a new standalone Credit Act that defines a designated regulator to oversee all credit providers operating in the market regardless of their industry,” she said.
A credit score is a numerical expression based on a level analysis of a person’s or institution’s credit files to represent the creditworthiness of the entity.
A credit score is primarily based on credit report information typically sourced from credit reference bureaus (CRBs).
The introduction of the CRBs to Kenya’s financial scene was a much-needed solution to the banking crisis of the 1990s which saw the collapse of a number of banks, triggered in part by non-performing loans (NPLs).
In the period between 1996 and 1999, the proportion of NPLs grew from 17.7 per cent to 34.2 per cent as compared to performing loans, according to data from CBK.
A key contributor to the rise in NPLs was the information asymmetry amongst banks, allowing borrowers to migrate freely across banking institutions on the occurrence of a default.