Saturday, September 20, 2008

Credit bureaus the way forward for banks in dilemma

Written by Antony Ragui
The increase in oil prices has had a direct effect on inflation
September 19, 2008:
The recent slowdown of the global economy occasioned by the meltdown of the sub-prime mortgage market in the US, the increase in World Oil prices and the ensuing credit crunch has been a major concern for economists the world over.

The issue in the past was would this crisis of the US markets affect our economy? Now we are asking, when will the full effects of this crisis hit our economy and how severe will they be?

The US market being in recession is a reason for other countries to safeguard themselves. Being the largest economy in the world, a slow-down in this consumption due to the credit crunch and recession will have a direct impact on all economies that directly export to US.

In Kenya, the slowing of the US economy as well as the increase in oil prices has had a direct effect on inflation.

The post-election violence led to a disruption of price mechanisms by having a direct impact on supply of goods and services by negatively affecting transport around the country. What does this inflation mean to financial institutions? There is reduced ‘supply’ of deposits as savings reduce and a general increase in cost of living.

Credit demand

On the other hand, there is a corresponding rise in the cost of doing business, leading to an increase in demand for money from these same commercial banks.

What then are the alternatives for banks?

CBK and the government have asked commercial banks to be patient and keep the interest rates constant. So far this has worked, but the lenders will soon be faced with reduced deposits and increased defaults on current loans as global economies slow down.

There is a solution to this: Credit bureau, Credit reference agency, credit information services or credit registries. Developing and developed economies world over have used these institutions to accurately price risk and aid in decisioning by providing a holistic view of the borrower, leveraging on shared information from other industries, and hence creating a robust information system.

Our banks are yet to begin information sharing. In July 2008, the amendment to the Banking Act allowing for licensing of credit bureaus was gazetted. This exercise of sharing of borrowers’ information will not happen until early next year.

In the meantime, banks will have to contend with increased default risk and tightened internal controls as they await the commencement of the legislation and advent of this information age.

Ragui is the managing director, Quest Risk Solutions Ltd.

CBK puts serial loan defaulters on notice

East African Standard

Published on 19/09/2008

By James Anyanzwa

The Central Bank of Kenya (CBK) will formalise operations of the long-awaited Credit Reference Bureaus (CRBs) next week.

The move follows the gazettement of CRB regulations by Finance Minister on July 11.

Establishment of CRBs was part of the Bretton Wood institutions (IMF and World Bank) financial sector reform programme aimed at combating soaring levels of Non-Performing Loan portfolios (NPLs) that had crippled many banks in the 1990s.

"This is a big milestone in the banking industry," John Wanyela, the Kenya Bankers Association (KBA) Executive Director said.

However some market players contend that the new legislation, which limits shared information to only that related to loan defaulters, may not guarantee an optimal growth of the banking industry.

"This law is still limited to sharing information on defaulters only. But for this market to grow, both positive and negative information concerning clients should be shared," a senior director at a local bank told The Standard on Thursday.

The availability and use of credit bureau reports in credit decisions increases the quality of credit decisions and minimises fraud.

CRBs collect and compile detailed information on the payment performance of an individual or a company, basing it on creditworthiness.

Sharing credit information

"With the gazettement of the regulations, the Central Bank of Kenya will now begin to receive applications from viable credit bureaus. CBK will issue licenses and supervise the credit bureaus," Ms Rose Detho, CBK director, Banking Supervision said, last month.

The new regulations will guide the system of credit information sharing and help identify and isolate serial loan defaulters, who account for the huge stock of non-performing loans.

This will enable banks lower the price of credit facilities for borrowers with a good profile.

The transactions between the bureaus and the bank have in the past been underpinned by confidentiality of information, which, if given to a bank, should not be passed on to a third party.

The move to have the CRB legislation in place came in the wake of instability in the banking industry as a result of high default rates reported at Sh101 billion (35 per cent of the gross loans) as at May 2000.

However, the ratio of gross non-performing loans to gross loans declined to 9.5 per cent (Sh58.3 billion) by May this year, according to CBK’s latest monthly Economic Review, mainly due to write –offs and recoveries.