CBK Asks Banks To End Reliance On CRB Listings To Approve Loans
11/11/2022 21:48 in Business
The Central Bank of Kenya (CBK) has requested banks to loosen their reliance on CRB listings to determine good or bad borrowers when issuing loans.
This as part of ongoing reforms to the credit information sharing framework (CIS) which is premised on improving credit disbursements to small and medium enterprises (SMEs).
“Banks are required to consider the credit score of a borrower in addition to other factors in making a lending decision. This approach would allow borrowers and especially micro, small and medium-sized enterprises to access appropriately priced credit,” the CBK stated.
At the same time, the CBK has directed Credit Reference Bureaus (CRBs) to place a disclaimer on credit reports that the credit score indicated must not be the only factor used in approving credit.
“CBK has mandated all CRBs to include a standard statement at the top of every credit report indicating that a ‘customer’s credit score should not be used as the sole reason by a lender to deny a customer a loan’.”
The CBK says it is further working with CRBs to improve the quality of credit reports, enhancing the robustness of their credit scoring models.
The CBK is looking to break the use of adverse credit reports, issued by CRBs, as a reason to deny borrowers credit, a stance loosely described as blacklisting.
Even so, the banking sector regulator has encouraged borrowers to make payments on loans when they fall due to build on a good credit score.
The reforms envisioned by the CBK are expected to supplement the approval of risk based pricing for commercial bank loans which will see lenders price credit according to risks presented by each individual borrower.
The risk-based pricing of loans is expected to see banks serving loans to more borrowers who would otherwise not been priced in under the previous ‘flat interest-rate’ regime.
“CBK urges the public to honour their payment obligations on their credit facilities when they fall due. This will enable them to build a good credit history based on their payment behaviour and thereby obtain loans at better rates,” the CBK added.
Licensed CRBs (Metropol, Creditinfo and TransUnion) have in a joint statement welcomed the directives by CBK complementing the reserve bank’s view that loan approvals must not be solely based on CRB listings status.
“Finance providers have their own risk policies when it comes to extending credit, and a consumer’s credit information is just one factor they consider when they make decisions,” noted TransUnion Kenya CEO Morris Maina.