Saturday, September 20, 2008

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.

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