Demystifying Credit Information Sharing mechanism and what to do if you get a positive, negative or erroneous report from Credit Reference Bureaus
A lot of Kenyans are running scared. They are worried that, on account of defaulting on their Mobile-money loans, they will never be granted loans by financial institutions like banks and Saccos. The perception that has been created out there is that if you ever get ‘listed’ with any of the three Credit Reference Bureaus (CRBs), then you are a dead goose credit-wise.
So, on a good day, you decide to check your credit report from one of the CRBs in town. Either you are applying for a loan, a new job, mortgage or just out of curiosity. When the report comes, it is replete with surprises. It shows that certain lenders already flagged you as a defaulter. Some of the loans may be known to you, e.g. mobile loans, while others may be totally alien or incorrect. Does this mean you despair and resign to the fate of never being able to acquire a credit facility ever again? Majority of people think that Credit Information Sharing mechanism being adopted throughout the financial sector is out to punish them, should they default on their loans. But nothing could be further from the truth.
Anyone who borrows even a thousand shillings from a bank, Sacco, microfinance institution or even through the mobile money services is consumer of credit. The above credit providers are required by law to exchange information about all their credit customers through CRBs which are licensed by the Central Bank of Kenya. The information is submitted every month and it shows the repayment patterns of every borrower.
So whether a borrower pays on time or defaults, his name is with the CRB. In Kenya, commercial and microfinance banks are mandated to share information on their entire loan books. Other non-regulated credit providers, while not mandated by law to submit customers’ credit files, nonetheless utilize the services of CRBs.
Credit Information Sharing (CIS) is therefore a process where the providers of credit submit information on all their outstanding loans and advances to CRBs. While it has the potential of smoking out serial defaulters who have been the bane of many financial services providers, it is nonetheless the most progressive and customer-centric piece of legislation in recent times. It is heavily skewed in the borrowers’ favor.
“The borrowing public needs to see the CIS mechanism as a reputation management, not a blacklist tool. It shows how you are trustworthy with credit, to the extent that you can be given credit on the premise of reputational collateral,” says Jared Getenga, CEO of the CIS Kenya, an industry association of lenders, credit reference bureaus, regulators and interested parties within the financial sector.
CIS is an innovative financial inclusion initiative, because it means people who would never have acquired loans due to lack of tangible security, can now use their repayment history to assuage a lender. Further, borrowers with positive credit history can use that information to negotiate for lower interest rates from the banks. When a borrower’s credit history is accessible by lenders from a trusted source, it means quicker turnover for loan applications, while the cost of processing the loan itself is drastically reduced. Prior to CIS, banks would engage third parties to investigate the details of a loan applicant and pass on the “search costs” to the customer.
“The good borrower can benefit a lot from CIS. CRBs make credit reports available as evidence of good performance, which could translate to a lower cost of credit, flexible repayment periods and lower reliance on tangible collateral such as land and buildings amongst other preferential terms,” he says.
For the lenders, CIS is a godsend gift. It allows them to access a customer’s credit history and reports that have already been processed and analyzed by credit experts. A customer’s past repayments with credit providers is made available in one document that is weighted using various benchmarks and points awarded depending on where the customer scores against each criteria.
What CIS does is that it creates a link between the borrowers and lenders and creates an avenue for the economically disadvantaged in the society to gain entry into the credit market. The lending cost to micro, small and medium sized enterprises is reduced and lenders are more willing to open up their loan books to more people. Therefore, the relationship between access to credit and economic development becomes clear. Further, with effective CIS, the ration of Private Sector Credit to GDP rises, improving efficiency in financial intermediation that comes with reduced costs of operations. This enhances the stability of the financial system hence faster economic growth.
CIS Kenya was established to foster the effective development and implementation of a credit report mechanism within Kenya as well as promote cross-border information sharing. It was launched in September 2013 to institutionalize the Credit Information Sharing Forum whose core mandate was to promote global best practices in credit provision whilst playing a leading role in fostering the growth of the credit market. The Association’s unique task is to establish a self-regulatory mechanism centered on credit information sharing, that eventually yields benefits for credit providers, consumers and the economy at large.
Located at the Kenya School of Monetary Studies, CIS Kenya is currently capacity-building to become the central source to which all banks, micro finance banks and institutions as well as Saccos forward their credit files. Currently, banks have to remit the same credit files to the three CRBs under delegated authority from CBK. This is prone to conflict of interest because the CRBs are private for-profit entities who also take up the responsibility of requesting and ensuring they receive the credit files from the banks.
CIS Kenya CEO says that banks are eager to have one source of submitting this information and at a stipulated date of the month. “To avoid conflict, the ideal process should see all banks forward their credit files to CIS Kenya, from where the CRBs can then get the information. CIS Kenya would be the most objective and ideal handler of this information and would be best suited to ascertain the veracity of the data,” he points out.
Erroneous Report from the CRB?
A variety of reasons can lead to a CRB generating an erroneous report. However, the CIS mechanism is designed such that the onus rests with the lenders to produce accurate credit information. The CRB Regulations 2013 gives directions on what should happen whenever a customer complains. If a dispute is not resolved within fifteen days after the customer has notified the CRB of his objection, such disputed information shall be removed from the database of the CRB. The disputed information may, however, be reinstated if found to be correct after due investigation by the CRB and concerned bank.
Oftentimes, an aggrieved customer may contemplate going to court to seek redress for contentious issues in his credit report. However, that would be a drastic move, considering that there exists various ways of solving the problem out of court. The most reliable and efficient way to deal with an erroneous, inaccurate or incorrect report by a CRB is to seek help from Tatua Center. This is an independent quasi-judicial office established to resolve all CRB-related disputes between customers, lenders and CRBs through Alternative Dispute Resolution mechanism.
The first step whenever one gets an erroneous report is to lodge a complaint with the relevant CRB in writing. The report may indicate that you owe a particular lender while in actual fact you already cleared. It could be that you paid past the due date. Within five days, the CRB should attach a note on your report and send it to your lender and request conformation of the accuracy of the data. The CRB should investigate and respond to the lender within fourteen days with a notice of resolution, advising whether the disputed information is to be deleted, corrected or remain unchanged.
If the investigations revealed an error, the CRB shall remedy the error and inform all persons who may be affected by the erroneous information, including the customer. If the CRB does not complete investigation within 21 days, then it is supposed to delete the disputed information as requested by the customer and if it completes later, may reinsert or revise the disputed information.
Whenever the notice of resolution recommends a change on the credit report, a CRB is supposed, within five days, to send a notice of change to all its subscribers who may have obtained that customer’s credit information in the previous twelve months. However, should you request a CRB to investigate a credit report you are disputing and then you turn out to be wrong, you will be charged by the CRB.
After these borrower initiatives fail to bear a satisfactory outcome, a customer can seek help from Tatua Center. The ADR center acknowledges that court cases may drag for up to three years, with dire consequences to the litigant in terms of time and lost opportunities. Tatua is a pioneering ADR center in CIS and it is the first of its kind in region. So far, it has had a 91 percent success rate, having received 510 cases and resolved 461. The credit report disputes are usually resolved within a few days.
“The ADR approach provides a valuable option for both customers and financial institutions, creating a conducive environment for issues to be addressed while upholding the relationship between the parties,” says Tatua Center website. Tatua Center’s services are free to the credit consumers.
Being negatively listed with the CRBs does not mean that an individual cannot get a loan from financial institutions. In instances where the previous credit has been settled, a clearance certificate can be obtained from the CRBs. Market observers have noted instances where a mere negative listing has resulted in a borrower being denied credit. Where viable, a credit provider should be able to find out the circumstances that led to the negative listing.
Further, negative listing is calibrated and unless one is a serial defaulter, or the loan is pretty sizeable, an individual should still be able to get credit. However, the terms of the credit might differ and one may be required to provide collateral, a higher interest rate may be applicable and a more thorough vetting may take place. A loan is deemed defaulted after 90 days. For those in business, the financial fortunes oscillate and their tide could turn for the better and a keen credit analyst should be able to identify the pattern. This can then inform the repayment schedules for that customer.
It is not doom and gloom when confronted with a negative listing. If one can be able to demonstrate in successive loans that he repays on time, his credit history will self-correct in due time. It is worth noting that CRBs can only provide credit history spanning 24 months only, while the report is for 12 months. Moreover, credit appraisal by banks only looks at 12 months.
Even in instances where one is adversely listed, and they strive to clear or regularize the loan, they cam still be eligible for a credit grant in a matter of months. Being listed negatively, for example for defaulting on Ksh5,000 Mshwari loan does not mean you cannot be granted a Ksh1 million car loan if you are employed and earn a net income of Ksh100,000.
At the end of the day, what will help, in spite of your negative listing with a CRB, is your ability to explain and convince the lender on your creditworthiness. Usually, creditworthiness is measured against the 5C’s which are: character (integrity), capacity (sufficient cash-flow to service the obligation), collateral (assets to secure the debt), capital (net worth) and conditions (such as the interest rate and amount of principal, etc).
Whilst in the days gone by one would default and convincingly explain his predicament to the lender (and get an extension) with CIS mechanism, the loan files are submitted electronically to CRBs every month. This means the bureaus will develop a credit report objectively and independent of your personal circumstances.
The CIS emphasis is on instilling honesty and fiscal discipline amongst the borrowers while availing to credit providers a quantifiable mechanism that they can use to appraise and reward their customers accordingly.