Kenya: Credit Reference Bureau to share data with MFIs

By Margaret Wahito, Capital FM

Microfinance Institutions (MFIs) in the country will soon start accessing their customers’ data at the Credit Reference Bureau while processing loan applications.

Kenya Bankers Association Chief Executive Officer Habil Olaka said the association and the Central Bank of Kenya are currently working on regulations to manage the process.

“We started first with negative information sharing and then positive information sharing which is what we call full file reporting and that was initially with banks only. After we fully achieve this with the banks, we will now move to the comprehensive reporting where we will have other credit providers,” said Olaka.

He said the information sharing will move to MFIs before it is rolled out to Saccos.

“We will start with the microfinance because most of them are operating just like banks where they even give credit and even take deposits. So it’s quite easy to bring them on board, then we will go to the Saccos and other credit providers,” Olaka added.

In the recent past, MFIs have argued that lack of access to the bureau puts them at a disadvantage by exposing them to the risk of lending to individuals and businesses that have previously defaulted on their loans.

Olaka however said that commercial banks are willing to share credit information with MFIs if the regulation is amended to allow this.

“I know changing regulations and laws can take even years, but we are working with the Central Bank to ensure that all are on board. In fact, we have already started engaging the institutions on this issue, “he said.

Kenya: Small borrowers pay the highest price for loans in Kenyan market

By George Ngigi, Business Daily Africa

High risk profile and heavy operational costs have widened interest rate spreads in the lowest segment of the lending market, leaving small borrowers with the highest loan burden, a new banking sector survey has shown.

The survey by audit firm RSM Ashvir shows that the interest rate spreads — the difference between the rate charged on loans and what banks pay depositors — stood at an average of 11 per cent last year, making Kenya one of the most expensive markets to borrow in East Africa.

The profitability of most banks is linked to money they make from lending operations and where the spread is a key determinant of revenue.

Official statistics show that the wide interest rate spreads were key drivers of the 16.1 per cent profits growth that the lenders posted last year.

Commercial banks returned Sh89.5 billion in profit before tax in 2011 compared Sh77.1 billion that the industry realised in 2010.

Profitability of commercial banks and the interest rates they charge has been the subject of intense public debate since late last year causing parliamentarians to seek legal controls on the cost of money.

On Wednesday, RSM Ashvir said its survey had found that Jamii Bora has the widest interest rate spread of 38.9 per cent, followed by K-Rep at 20.8 per cent, Imperial Bank (20.5 per cent), Family Bank (16.5 per cent), UBA (15.9 per cent) and Equity Bank (15.7 per cent).

“These banks mainly lend in smaller amounts that demand higher margins to finance the high cost of maintaining the accounts,” said Ashif Kassam, a managing partner at RSM Ashvir.

Jamii Bora disputed the figures, saying the audit firm had failed to consider that it sold off some of its bad loans last year as it moved to improve its loans portfolio.

“Last year, we sold our bad loans of about Sh300 million and wrote back suspended interest, which makes our interest income look big,” said the bank’s CEO, Samuel Kimani.

The survey found that banks with a large customer base in the corporate and trade finance markets have significantly lower spreads of up to 4.5 per cent at Development Bank.

Spreads were also significantly low at Citi Bank (6.6 per cent), Bank of Africa (6.5 per cent), Oriental (6.5 per cent) and Middle East (5.7 per cent).

Kenya Bankers Association (KBA) said the higher spreads charged by microfinance banks are linked to the level of risk in the market segment.

“This has more to do with the product than the size of the borrower,” said Habil Olaka, the KBA chief executive.

Mr Olaka said unsecured products attract higher charges because they are riskier unlike the ones that are backed by collateral.

But RSM Ashvir said that at an average of 11 per cent, the interest spreads are high considering that the default risk has dropped steadily in recent years with non-performing loans dropping to 4.5 per cent – below the global benchmark of five per cent.

“The acceptable spread in Kenya should be between 7.5 per cent and 10 per cent so overall banks are enjoying high spreads that are reflected in the industry’s high return on capital at 34.6 per cent,” said Mr Kassam.

The audit firm said it had settled on 7.5 per cent by factoring Kenya’s high inflation rate and credit risk and comparing that with the global standard interest spread of five per cent.

Critics have argued that the fact that banks with small spreads made profits enforces demands for lower interest rates which stand at more than 28 per cent with some lenders.

“The problem is not that banks cannot operate with lower spreads but become rigid – meaning they can’t respond to market changes and will exclude some borrowers,” said Mr Olaka.

Kenyan parliamentarians have proposed that the lending rates be capped at four per cent above the Central Bank Rate (CBR) and deposits rates fixed at not lower than 70 per cent of the CBR.

READ: MPs ride on tax law to tame commercial banks

Parliamentarians have put up a spirited fight over interest rates, terming banking sector profits as abnormal, standing at more than four folds the GDP growth rate.

In the last financial year, Barclays Bank posted the largest return to shareholders at 61 per cent, followed by Standard Chartered at 49.1 per cent.

KBA acknowledges that this level of return on capital is high but argues that the right figure to use is the risk adjusted return which factors in the unique operational challenges that the lenders face.

RSM Ashvir said it used the published annual results to calculate the interest spreads.

Mr Kassam said the firm had divided interest on advances by average performing advances to get the average yield on advances and to arrive at the average interest on deposits.

Mr Kimani of Jamii Bora said that the bank is currently lending at between 18 and 24 per cent and paying depositors at the rate of between two to three per cent.

“For large deposits we pay higher. I have just come from taking Sh1 million at 15 per cent and I can tell you that our spread is at half the 38 per cent they are stating,” he added.

K-Rep managing director Albert Ruturi held that it had a micro-finance arm whose clients risk profiles are high.

“If you look at our micro-finance business then you should compare us with Kenya Women and the others because micro-finance business is labour intensive and associated costs high,” said Mr Ruturi.

Kenya: Noose tightens on loan defaulters

By John Oyuke, Standard Media

The Central Bank of Kenya (CBK) is working on ways to rope in all financial institutions into the Credit Information Sharing (CIS) system in order to widen the net for credit reference check.

The mechanism, that will make it difficult for loan defaulters to access credit facilities, is already in place for commercial banks.

The bank’s governor Prof Njuguna Ndung’u said work on the modalities of incorporating Deposit Taking Microfinance Institutions (DTMI) into the new mechanism is in progress.

He said the system will help the Government create a framework where all financial institutions would have access to and exchange credit information across the board.

Banks, DTMIs, Savings and Credit Co-operative Societies (Saccos) and other licensed credit providers would all be incorporated into the system and start sharing credit information with each other.

“It is hoped merging of credit information from these various players will help provide a stronger credit market,” said the governor.

According to Ndung’u this would improve the pool of credible borrowers, decrease defaults, reduce credit costs and ultimately result in a stable financial sector.

CBK has already tightened the vetting process for loan applications in a bid to lower risk and subsequently help bring down interest rates charged by commercial banks.

It has already licensed credit reference bureaus to collect information on customers’ loan repayment history.

Dishonoured cheques

The bank has also instructed commercial banks to provide information on their customers, including records of dishonoured cheques, compulsory closure of accounts and late payments or credit defaults on all types of facilities.

Lenders are also required to share information on non-performing loans, false declarations and statements, receiverships, bankruptcies and liquidations.

Although the new plans are not meant to block potential borrowers with bad records from accessing credit facilities, it will guide banks to decide when and how to lend such people money, ordinarily under conditions that are expected to be more stringent compared to that reserved for customers with higher credit scores.

Central Bank believes this will help reduce incidents of non-performing loans and possibly save Kenyans from the high interest rates currently being charged by commercial banks.

The first credit bureau was licensed by CBK early last year after several years of deliberations between the Kenya Bankers Association (KBA), CBK, the Ministry of Finance and the office of the Attorney General.

MFIs seek access to data on serial loan defaulters

By George Ngigi (gngigi@ke.nationmedia.com), Business Daily Africa -

Microfinance institutions are seeking to access information on serial loan defaulters to avoid giving credit to blacklisted borrowers, but commercial banks are hesitant to share their data on bad debtors with the micro lenders.

Central Bank of Kenya (CBK) has licensed credit reference bureaus to store data on borrowers who default on their loans, but the information is only circulated within commercial banks.

Undue advantage

With the microfinance institutions now also under CBK’s regulation, the lenders are arguing that banks have an undue advantage over them as they have information on defaulters that the small lenders don’t.

“Most banks have been scaling down when we are scaling up, resulting in us seeking a common clientele,” said Phyllis Mbungu, the chief executive of SMEP, a microfinancier.

Banks have lately slashed the minimum loan amount to as low as Sh5,000, cutting into the turf of micro lenders who target low income earners and small and medium enterprises.

The MFIs fear that persons whose loan applications have been turned down by banks may turn to unsuspecting micro lenders piling on them non performing debts.

The current credit reference bureau regulations 2008 however limit sharing of information on defaulters to commercial banks only, meaning the law will need to be amended to allow micro financiers tap into the data base.

Steven Kamau, the business development manager at CRB Africa group said there will be need to amend the Micro Finance Act to allow MFIs to share default information.

The slow passing of the Banking (credit reference bureau) Regulations 2008 however suggests that it could be years before MFIs are allowed to access loan default information.

“It may be more expeditious to make changes to the CRB Regulations 2008, to allow for the participation of the MFIs in the credit information sharing mechanism for banks,” said Mr Kamau.

The Kenya Bankers Association—- which was instrumental in developing the reference bureau laws jointly with CBK—said banks are willing to share information with micro lenders when the legal framework to guide the information exchange is established.

“Banks are aware that credit reports are more meaningful to lenders when they contain comprehensive information that covers the performance of borrowers across the credit market,” said Habil Olaka, the CEO Kenya Bankers Association.

KBA said it was preparing a proposal for the setting up of a Kenya Credit Providers Association that would create one large database of loan repayment information accessible to all lenders.

Some microfinanciers are however still hesitant to share their client information, arguing that it amounts to giving away their trade secrets.

“The industry is still young and growing, there is a lot of suspicion between MFIs,” said Peter Mugendi, the CEO of Kadet Microfinance.

Mr Mugendi said MFIs currently have a default rate of 15 per cent, about double what is considered an acceptable industry average.

MFIs mostly rely on group co-guarantorship to cut default risk among borrowers.

He added that the current default rate may not be accurate as the non-CBK licensed MFIs are not under a central regulator, and hence have no standard reporting requirements.

“We have multiple borrowers who join different groups sponsored by different lenders. They then borrow from one to offset the other and so on and in the end they are over-burdened to pay,” said Mr Mugendi.