By Erick Onderi,
If you’ve used a credit card or applied for a loan, you’ve shared your life, your personal information. This information will find its way to another party who will store it for the benefit of another party.
This is how CIS simply works. CIS is a process where credit providers such as banks and licensed Microfinance Banks submit information about their borrowers to licensed Credit Reference Bureaus (CRBs) so that it can be shared with other credit providers.
CIS is also referred to as Credit Scoring, Credit Referencing or Credit Reporting, among other terms. Lenders pool this information electronically and borrow such information using centralized databases held by Credit Reference Bureau.
Credit Information Sharing was introduced in Kenya’s banking sector following issuance of regulations under the Banking Act in 2007. The law established a basis for sharing of credit information among banks through licensed CRBs. In due course, the Banking Act, Sacco Societies Act, Central Bank of Kenya Act and Credit Reference Bureau Regulations, 2013 provided for an expanded mechanism.
The current consumer is protected by the Constitution. He is an empowered species. He has the right to goods and services of reasonable quality; to the information necessary for them to gain full benefit from goods and services; to the protection of their health, safety, and economic interests; and to compensation for loss or injury arising from defects in goods or services.
The Constitution in Article 35 provides for a right of access to information. It provides that every citizen has the right of access to interalia information held by another person and required for the exercise or protection of any right or fundamental freedom. It further provides that every person has the right to the correction or deletion of untrue or misleading information that affects the person.
This constitutional provision finds its way to the Credit Reference Bureau, 2013. Regulation 35 provides for a customer’s right of access and corrections to information. A customer has a right to know what information the institution has submitted to the Bureau regarding that customer. Further a customer shall be entitled to access credit reports relating to the customer that are kept in a database administered by a Bureau.
The aim of CIS is to help check the lack of credit information between borrowers and lenders. This lack of balance in information is commonly referred to as information asymmetry. This current status has adverse effects such as unsuitable loan products/terms, and exclusion of certain categories of borrowers from the credit market.
There are currently 3 CRBs that help in solving this information asymmetry challenge. They are as follows:-
- Transunion Credit Reference Bureau Ltdlocated at Prosperity House 2nd Floor Westlands Road. transunionafrica.com
- Metropol Credit Reference Bureau Ltdlocated at Shelter Afrique House, 1st Floor Longonot Road, Upper Hill. metropolcorporation.com
- Creditinfo Credit Reference Bureau Limited. creditinfo.co.ke firstname.lastname@example.org or email@example.com
The CRBs are licensed by the Central Bank of Kenya. In Kenya, as per the Credit Reference Bureau Regulations 2013, commercial and microfinance banks are mandated to share information on their full loan books, meaning both good and bad repayment details of a borrower are shared. This data is submitted electronically on a monthly basis to the CRBs.
CRBs complement the central role played by banks and other financial institutions in extending financial services within an economy. CRBs help lenders make faster and more accurate credit decisions. They collect, manage and disseminate customer information to lenders with in a provided regulatory framework – in Kenya, the Banking (Credit Reference Bureau) Regulations, 2013.
The Central Bank of Kenya has tried to regulate the lending rates by reducing its Base Lending Rate almost every year. However banks have failed to reduce their lending rates. It is hoped that CIS will help curb this mischief by banks of making massive profits from customers by charging them expensively for obtaining credit from them.
Credit bureaus assist in making credit accessible to more people, and enabling lenders and businesses reduce risk and fraud. Sharing of information between financial institutions in respect of customer credit behavior has a positive economic impact.
CIS has numerous benefits to the parties involved. There is a common misconception that it only works on the favor of credit providers. Nothing is further from the truth. The Constitution seeks to elevate the rights of a consumer. The Consumer Protection Act and several other pieces of legislation including the Credit Reference Bureau Regulations place premium on protecting the rights of a consumer.
Some of the benefits that a consumer can achieve from CIS are as follows:
- It helps a customer distinguish themselves from the persistent defaulter. This makes their reputation be intact.
- It helps put a customer’s positive credit information from various lenders in one database that is credible. The database is available to both credit providers and the customer.
- It gives a customer a leverage to negotiate for good credit terms on the basis of their good repayment history. They can be able to get credit at a lower cost, flexible repayment periods and even request that no collateral be requested for the loan.
- Loan processing becomes easier as credit providers have online access to credit reports prepared by the CRBs
- Search costs are eliminated from the process of borrowing. Banks will not require to hire investigators to determine the credit worthiness of a customer before issuing credit to him.
- Customers are able to change credit providers and take advantage of competition to obtain credit at a lower cost better credit terms.
The Regulations now provide that both negative and positive information on a customer should be shared. The negative information include: non-performing loans; dishonour of cheques other than for technical reasons; accounts compulsorily closed other than for administrative reasons; proven cases of frauds and forgeries; proven cases of cheque kitting; false declarations and statements; receiverships, bankruptcies and liquidations; credit defaults or late payments on all types of facilities; tendering of false securities; and Misapplication of borrowed funds.
Licensed CRBs are required under the CRB Regulations to hold information on non-performing loans and other negative information submitted to them by banks for at least 5 years.
CRBs are required to prepare a credit report from the information they have on a customer. A negative listing on a borrower’s credit report does not mean that one cannot access a loan facility any more. It only means that lenders will treat you with more caution while appraising your loan, which might result to more stringent loan terms.
Information sharing about borrowers’ characteristics and their indebtedness can have important effects on credit markets activity. First, it improves the banks’ knowledge of applicants’ characteristics and permits a more accurate prediction of their repayment probabilities. Second, it reduces the informational rents that banks could otherwise extract from their customers. Third, it can operate as a borrower discipline device. Finally, it eliminates borrowers’ incentive to become over-indebted by drawing credit simultaneously from many banks without any of them realizing.
It is prudent that in the 21st Century, information should continue to flow. This serves to assist the consumer maximize benefits to be accrued from the credit market. The good consumer is the beneficiary of CIS.