Lenders have been advised 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.
Central Bank of Kenya (CBK) is working closely with financial institutions in implementing risk-based credit pricing, enhancing the robustness of their credit scoring models, and aligning them to best practices.
“When borrowers experience challenges repaying their loans, they should proactively engage their lenders. They should also periodically review their credit reports to track their scores and verify the accuracy of the reports. We remind the public that they are entitled to one free credit report per year,” CBK said.
The regulator also urged members of the public to honour the payment obligations on their credit facilities when they fall due. It said the move would enable them to build a good credit history based on their payment behaviour and thereby obtain loans at better rates.
One of the many ways lenders assess the risk of a loan is by referring to a consumer’s credit score, which is a three-digit number calculated from their credit history that is provided by any of the three credit reference bureaus currently operating in Kenya: Creditinfo Kenya, Metropol CRB, and TransUnion Kenya.
In that context, banks must consider a borrower’s credit score and other factors in lending. This approach would allow borrowers, especially micro, small, and medium-sized enterprises (MSMEs), to access appropriately priced credit.
Despite the progress in consumer credit scores, some borrowers continue to have concerns about using adverse credit information. Specifically, there is a perception that banks use negative credit reports to deny borrowers access to the loans they have applied for.
To alleviate this concern, the CBK has mandated all Credit Reference Bureaus (CRBs) to display prominently on credit reports the banking regulations 2020 statement that “a customer’s credit score should not be used as the sole reason by a lender to deny a customer a loan” – the statement will serve as a reminder of the appropriate use of credit reports and will be beneficial to both customers and lenders, it is said.
Only finance providers can decide whether to offer customers credit or decline their applications. Credit bureaus provide some of the information lenders use when making the decision. Still, each finance provider has individual lending policies and criteria for granting credit to a consumer, just one of which is a credit score provided by any of the three credit reference bureaus.
A credit report reflects a consumer’s payment behaviour over time, using a range of data, including payment history, credit utilization, and the number of credit inquiries requested from sources such as banks, microfinance institutions, savings and credit cooperative organizations (SACCOs), and traders. It can enable Kenyans to access credit products they might not be considered for and can lead to preferential interest rates, product features, and conditions.
Payment history is the most important credit score aspect because it shows how consumers have managed their finances, including any late payments. A consumer’s payment history is entirely within their control and responsibility – just as improving their credit score is made possible by a good repayment culture that includes borrowing wisely and repaying promptly.
Consumers who have never taken out a credit product do not have a credit score, which means that they haven’t been “tested” with credit, and lenders may be uncertain if the loan they grant will be paid back according to the terms of their agreement. Consumers who don’t have a credit score can still apply for credit, but lenders are likely to set more stringent terms for first-time borrowers as they build a credit score.
“Credit bureau information and insights enable a more inclusive lending system by providing objective data that helps lenders assess consumers’ ability to manage their credit. Ultimately, this system and the lending it supports enhances Kenyans’ quality of life and strengthens our economy,” says Morris Maina, CEO of TransUnion Kenya. “Credit scores are factual representations of a consumer’s credit history. Finance providers have their own risk policies for extending credit, and a consumer’s credit information is just one factor they consider when making decisions.”
According to Kamau Kunyiha, CEO of Creditinfo Kenya, financial institutions need accurate and relevant consumer information to help make informed lending decisions. “Access to credit is the foundation for a healthy economy, but one of the obstacles for credit access is a lack of information about borrowers. This is why credit bureau services are crucial; they provide the data financial institutions need to provide individuals and businesses access to essential financial products and encourage a healthier financial ecosystem,” Kunyiha says.
Existing regulatory frameworks in Kenya ensure greater financial inclusion, underpinning fair and equal access to credit information by consumers and businesses. Extending credit based on informed decisions can fuel economic growth, increase consumer access to essential resources and enable more efficient allocation of risk, costs, and financial reserves.
Access to consumer credit information enables consumers and private companies to transact with each other freely. The more objective information the business has, the more accurately it can meet consumer needs and preferences.
“Credit bureaus manage credit risk throughout a consumer’s financial life cycle, helping to increase financial institutions’ efficiency and reduce their risk exposure,” says Gideon Kipyakwai Group CEO at Metropol. “We use information from a variety of sources, such as banks, MFIs (Microfinance Institutions), SACCOs (Savings and Credit Co-operative Societies), HELB (Higher Education Loans Board), and other service providers to translate consumers’ credit behavior into a score that is just one measure used by financial institutions make their lending decisions.”
