March 21st, 2023

Recently, global financial markets and commentators have been gripped by the collapse of Silicon Valley Bank (SVB) following a run on its deposits. The failure of the 40-year-old institution, the 16^th largest in the United States, and the ensuing contagion, continues to reverberate across global financial markets.

Kenya too, has a chequered history of bank failures. The first bank closure in Kenya was in December 1984, followed by 1989 when seven financially destressed institutions were consolidated into the Consolidated Bank of Kenya. Not to be outdone, the 90s heralded a new era of bank failures; in 1993 alone, 11 institutions were placed under liquidation followed by 2 institutions in 1994.

A common factor that threaded these failures was the relatively high and unsustainable levels of non-performing loans. In response, the Monetary Affairs Committee (MAC) of the East Africa Central Bank Governors in 1995 directed member Central Banks to work with their respective bankers’ association to develop information sharing frameworks.

The onset of credit information sharing mechanisms in Kenya

In the early 2000s, the banking sector through an initiative of the Kenya Bankers Association (KBA) began to develop an information sharing mechanism modelled on best practice from other jurisdictions. At the same time, the Central Bank of Kenya in consultation with KBA initiated the process of developing the enabling legal framework. Earlier in 2001, the East Africa Credit Bureau Association (EACBA) had been formed as part of attempts to influence the development of the legal framework.

In 2003, an amendment to the Banking Act provided the legal provisions for the sharing of credit information among banks. The amendment also provided for the development of regulations to provide for, amongst others, the establishment and operation of credit reference bureaus. There were initially many obstacles and differences in opinions over the efficacy of a credit bureau established and operated by the banks, invariably, stemming from competing interests. Breakthrough was achieved when the banks realised and accepted that the solution was to outsource the service to a private sector bureau licensed by CBK.

In 2006, additional amendments to the Banking Act were made through the Finance Act that expanded the 2003 provisions by mandating the sharing of negative information by banks. The attendant Credit Reference Bureau regulations were gazetted in September 2008, providing for the establishment, operations, governance and management of credit bureaus and their supervision by the Central Bank. The effective date for the regulations was set as 1^st February 2009.

Following the enactment of the regulations, a joint CBK/KBA taskforce that had been established in 2007 to drive the reforms met at a two-day retreat to discuss the actions required to make the regulations operational. The taskforce was joined by representatives from IFC, the World Bank and FSD Kenya. The taskforce had earlier settled on establishing a credit provider association to institutionalise the reforms, a model that was borrowed from South Africa.

The retreat was useful as it pointed out several preparatory steps that would need completion or had not been thought about during the development of the regulations. A significant output was the development of a comprehensive constitution and code of conduct for the industry association. Consideration was given to the need for integrating microfinance institutions, Savings and Credit Cooperative Societies and other non-bank credit providers into the information sharing mechanism at a later stage. On 27^th August 2009, the Association of Kenya Credit Providers was formally launched by the governor of the Central Bank of Kenya. It was subsequently renamed to the Credit Information Sharing Association of Kenya CIS Kenya and relaunched on September 24, 2013.

First credit reference bureau license issued in Kenya

On February 9, 2010, CBK issued a license to the first credit refence bureau in Kenya, CRB Africa Limited. While delivering the keynote address during the formal launch, the CBK Governor observed that the first benefit accruing from the adoption of credit information sharing in Kenya will be ‘to facilitate the development of information capital and erode the risk premium associated with information asymmetry’. In the real world, the problem of information asymmetry often presents itself as a ’20 page’ application form, endless requests for information, getting sureties and guarantors or over collateralisation.

The following year in 2011, the first regional CIS conference aimed at sharing experiences with other countries and raising awareness on best practice in credit reporting was held.

The conference came at a pivotal time when discussions on the sharing of positive information were on-going. The mechanism had started off by sharing only negative information mostly out of concerns that sharing positive information would expose the banks’ ‘good’ customers to their competitors.

Whilst starting with negative information was a compromise to get the mechanism off the ground, it formed a negative perception that it was a blacklisting tool, fanning unintended perceptions that hold to date.

This period coincided with the clamour to introduce statutory caps on interest rates charged by banks. An earlier attempt to introduce caps, the so-called Donde Bill had been enacted by parliament but subsequently invalidated by the Court of Appeal.

Broadening of data sources to include limited participation by non-bank credit providers

While the caps were not imposed, it provided the opportunity to look at wider reforms required to lower the cost of credit. Consequently, the central bank of Kenya Act was amended in 2012 to mandate the participation of microfinance banks in the credit sharing mechanism and to mandate the sharing of both positive and negative information.

The revised credit refence bureau regulations to operationalise the amendments were gazetted in January 2014 with a commencement date of 1^st February 2014. The regulations further paved the way for the broadening of data sources to include limited participation by non-bank credit providers who, in the regulations, are referred to as third-party credit providers.

Notwithstanding the reforms, perceptions over the use of credit refence bureaus as a blacklisting tool were unabated. In 2016, a petition was filed in parliament, unsuccessfully, to disband credit refence bureaus on account of blacklisting borrowers.

At the same time, while the inclusion of third-party credit providers expanded the data sources for credit refence bureaus, inadequate monitoring of the data submission process compromised the robustness and credibility of the credit refence bureau data.

The proliferation of digital lenders and concerns over their practices added to the growing pressures to re-order the way in which credit providers participated in the information sharing mechanism.

To address these challenges, the Central Bank of Kenya constituted a technical working group to identify proposals aimed at reforming and streamlining the credit information  sharing mechanism. This process birthed the new (and current) regulations that were gazetted in April 2020, replacing the ones issued in 2013.

How well has Kenya’s credit information sharing mechanism worked so far? 

It is difficult to determine an appropriate yardstick against which to judge the performance of Kenya’s credit information sharing mechanism. Success can be judged by looking at the policy outcomes against relevant international measures or simply looking at the success of the policy systems and outcomes on its own terns: to what extent has the stated objectives been met?

Taking the latter approach and reflecting on the Central Bank of Kenya governor’s remarks at the launch of CRB Africa Limited, there is consensus that tremendous progress has been made but the journey remains unfinished.

In the long run, the effectiveness of the mechanism in achieving its stated aims will be significantly enhanced by the following: first is to ensure that the mechanism is open with equal and unrestricted access by all credit providers; second is to expand the types of data sources submitted, including alternative data source such as utility payments that can be leveraged for credit scoring, shorthand for a person’s credit worthiness; third is to enhance the quality and credibility of the data submitted in order to strengthen the predictive value of credit bureau data; last but not least, is to continuously strengthen the policy and regulatory framework  and ensure that he ‘rules of the game’ adequately supports market development and protects consumers.

This article was published by the Business Daily on 29th March 2023

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