The Central Bank of Kenya (CBK), on Monday, November 14, announced a major policy directive in the government’s efforts to delist 4.2 million who have been negatively listed on Credit Reference Bureaus (CRBs).
The CBK directed banks, microfinance institutions, and mortgage institutions not to consider the negative listing by beneficiaries of mobile-based loans for the next six months.
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The defaulters will have the negative listings suspended from their record and credit score until May 31, 2023.
This means that if you have been listed for defaulting on a loan of Ksh5,000 - the lending institution will give you a discount of paying up to Ksh2,500 - repayable before May 31, 2023.
The terms, however, apply to loans that were listed as non-performing on or before October 31, 2022. The grace period will strictly apply to mobile-based loans with a maturity of 30 days or less. The grace period will strictly apply to mobile-based loans with a maturity of 30 days or less- from banks and microfinance institutions.
The discount does not apply to mobile loans from digital lenders who offer credit through mobile applications.
The CBK’s Credit Repair Framework aims to extend financial credit products to at least 4.2 million Kenyans who have been locked out of mainstream borrowing after being negatively listed by CRBs.
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Those who will have cleared the defaulted amounts by the time the grace period ends in May 2023 will have the negative listing expunged from their record and the credit score calculated without reference to the default history.
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“Through the Framework, the institutions will provide a discount of at least 50% of the non-performing mobile phone digital loans outstanding as at the end October 2022, and update the borrowers' credit standing from non-performing to performing.”
“The institution will then enter into a repayment plan with the borrowers for a period up to May 31, 2023, for the balance of the loan. Upon expiry of the Framework, the credit standing of the borrowers with respect to these loans will depend on their repayment performance during the six-month period,” the CBK statement read in part.
The new administration led by President William Ruto has indicated that it would prioritise financial inclusiveness as part of its economic recovery plan.
Part of enhancing financial inclusiveness is increasing the pool of Kenyans who are able to access capital through affordable terms - mainly offered through the mainstream financial sector.
The CBK explained that in the aftermath of the global pandemic, about 4 million Kenyans could not meet their debt obligations for mobile and digital-based loans.
The total amount defaulted is estimated at Ksh30 billion. Rather than lose the whole amount, the new policy is expected to recoup part of the bad debt and increase the number of Kenyans accessing mainstream credit products. The impact is that lenders will forfeit about Ksh15 billion of the defaulted amounts.
“The borrowers covered in the Framework are mainly in the personal and micro-enterprises sectors and were adversely impacted by the COVID-19 pandemic. Their lives and livelihoods were severely impacted by the pandemic through inter-alia loss of employment and closure of their micro-enterprises.”
“The adverse effects of the pandemic continue to linger for the covered borrowers. Accordingly, the Framework is expected to enable this segment of borrowers to access credit and other financial services as they rebuild their lives and livelihoods,” the lending sector regulator noted.
The latest directive forms a series of government directives that have been made to improve the workings of CRBs and the credit access system.
In late September, days after assuming office, Ruto witnessed as KCB, Safaricom, and NCBA announced a major restructuring of the Fuliza overdraft facility.
The changes included a three-day grace period on the daily maintenance fee for customers who borrow amounts of Ksh1,000 and below.
The daily maintenance fee for amounts above Ksh1,000 was slashed by up to 40%.
The head of state told the lending institutions that the reforms had come in timely since his administration, through the CBK, had already been planning to introduce major reforms in the mobile-loans sector.
The mobile-loans industry has relatively higher interest rates compared to banks, saccos and microfinance institutions. This is partly due to the higher risk of default that pushes the cost of lending.
As part of the measures recently instituted, the government had in October 2021 announced a moratorium on the CRB listing of borrowers defaulting on loans less than Ksh5 million. The directive lasted for a year and lapsed at the end of September 2022.
The CBK has also over the past three years cut down on the number of institutions allowed to make negative listings to CRB.
In 2020, a total of 337 digital lenders and microfinance institutions were locked out of the CRB system after they were found to have been operating irregularly.
In April, CBK came up with further regulations, requiring licensed digital lenders to issue a written 30-day notice to a defaulting borrower before submitting the name to the CRBs.
The measures announced previously have focused on stopping the entrance of new defaulters in the CRB negative list - but little had been done to delist the over 4 million Kenyans who already have low credit scores due to negative listings.
The discount on defaulted amounts and the suspension of mobile-based loan defaulters is expected to go a long way in reforming the credit scoring system in line with the new President’s agenda.
“Instead of saying you are in or out, we should have a credit scoring mechanism so we can have a graduated list from the least to the best so that everybody can have a chance even if you are somewhere at the bottom. You can always work your way up as you learn the ropes.
“What we are asking is we do not want credit listing to be an all-or-nothing, in-and-out engagement. We want credit listing to be a facility that gives everybody a chance to be their best in their own time,” President William Ruto stated, days after assuming office.
The reforms come at a time when the government is finalising the policy framework on the Ksh50 billion hustler’s fund, which is also expected to rely on a credit score in the distribution of accessible credit to small and medium-scale entrepreneurs.
According to a gazette notice by Cabinet Secretary for Cooperatives and Micro, Small, and Medium Enterprises Development Simon Chelugui, the credit score will guide the interest that beneficiaries of the fund will be charged.
The regulations cited as the Public Finance Management (Financial Inclusion Fund) Regulations, 2022 - were published ahead of the December 1 launch of the fund - as promised by the head of state.