Tuesday, November 23, 2010

Loan defaulters face tough times in fresh vetting rules

By David Mugwe. Business Daily Tuesday, November 23 2010

The Central Bank of Kenya has widened the risk assessment mandate of lending institutions in a move that could leave thousands of potential borrowers with poor credit scores and expose them to higher interest rates or deny them access to loans.
Commercial banks and micro-lenders are now required to share a wide range of information on their customers, including records of dishonoured checks, compulsory closure of accounts and late payments or credit defaults on all types of facilities, according to the new rules published last week to facilitate the establishment of a reliable risk assessment system.
The lenders are also required to share information on non-performing loans, false declarations and statements; receiverships, bankruptcies and liquidations; tendering of false securities, misapplication of borrowed funds, proven cases of frauds, forgeries and check kiting to help profile potential borrowers in Kenya’s fast growing credit market.
Commercial banks are not expected to deny potential borrowers with a tainted past credit but will lend to them under tough conditions that are significantly different from the easy terms reserved for customers with high credit scores.
“Sharing of negative credit information does not amount to blacklisting. Such information is expected to be taken into account during the assessment of applications for loans and other bank facilities,” said the CBK in a statement. Credit reference bureaus that have been licensed to profile potential borrowers using information provided by the banks are also expected to add into the mix an individual’s record in the payment of utility bills, use of credit cards and payment of university loans.
Kenya established a credit referencing system early this year aiming to manage the high rate of loans defaults in its banking system that only escalated in the past two years of economic slowdown.
Commercial banks have also pointed to the high default risk as part of the reason interest rates in the personal loans market remain high at more than 15 per cent despite the recent decline in the benchmark Central Bank Rate (CBR) and the low inflation.
It is also expected that customer profiling and credit scoring will help borrowers negotiate the terms and conditions of their loans – a move that should help those with high credit scores get favourable terms.
Lenders say borrowers with good credit ratings could benefit from reduced interest rates besides getting waivers on other lending conditions such as collateral requirements while the banks get an additional tool to minimize non-performing loans.
“Basically this should aid growth of the credit market,” said John Wanyela, Kenya Bankers Association executive director. “It should help the lenders to reward those who pay on time and instill discipline in the credit market,” he said. Though many consumers are likely to see the new regulations as tilting the credit market landscape in favour of commercial banks, bankers maintained the information will only make risk assessment easier to the advantage of the borrowers.
“There has been no information on credit histories of individuals approaching the banks for loans and this information should make it easier to make a distinction,” said Wachira Ndege, chief executive officer, CRB Africa – a credit reference bureau.
“The person who defaults and issues dishonoured checks…gets the higher interest rate while the one who does not have these gets a lower interest rate,” he said.
Commercial banks had requested for 103,332 credit reports by the end of September, according to the Central Bank report. The number is expected to rise steadily with the licensing of more credit reference bureaus and as lenders go on the offensive in the personal loans market.
The CBK has so far licensed two credit reference bureaus and is processing two other applications.
Jared Getenga, project manager, Kenya Credit Information Sharing Initiative (KCISI), a CBK and Kenya Bankers Association initiative that is mandated to co-ordinate the credit information sharing mechanism, said customer profiling should help banks avoid lending to serial defaulters.
Information sharing is also expected to compel previously unwilling debtors to pay up offering the lenders an opportunity to significantly reduce their bad loans books culminating in lower interest rates.
“Customers will begin developing intangible collateral for use in negotiating better borrowing terms and will benefit from faster processes when obtaining loans, since information that banks require will be more readily available” said Mr Getenga. “This should also help entrench a culture of responsible borrowing that is good for society as a whole,” he added.
Under the new rules, customers are entitled to a free copy of their credit report at least once a year and within thirty days of receiving an adverse notice.
With the consent of their customer, banks can also share positive information to enhance their creditworthiness. “Sharing of positive information will enhance the credit worthiness of the customers who can use the positive credit profile to negotiate for better terms and conditions with banks,” said the CBK.
Gross loans and advances rose six per cent between June and September, according to the CBK even as the stock of gross non-performing loans (NPL’s) declined by 0.5 per cent over the three month period. Gross loans and advances went up from Sh828.9 from Sh878.8 billion while gross non-performing loans declined to Sh61.2 billion in September from Sh61.5 billion in June.
The CBK said that the quality of assets, measured as a proportion of net non-performing loans to gross loans improved to 2.5 per cent from three per cent over the same period, with the ratio of gross NPL’s to gross loans improving to seven per cent from 7.4 percent in June, this year.

Thursday, November 18, 2010


In the papers today - CRB advertisement to the effect that you can register with them for notification alerts; anytime a bank accesses your credit report, anytime adverse information is listed on your credit report and anytime other credit guarantors report your repayment history. I haven’t asked but it should be a subscription based service.

Not in the papers – The Credit Reference Act allows you one credit report per annum from the licensed credit bureaus at no charge.

Wednesday, November 17, 2010


The banks in Kenya now have credit bureaus with which they share negative debtor information; an information sharing systems is even backed by legislation. Some larger corporate make use of credit bureaus when making credit decisions. One credit bureau Metropol East Africa has a service for rating SME’s to help them access credit from bigger organizations. These efforts are largely employed by the larger corporates in the formal sector.
SME’s also face major credit risks from other SME’s and larger corporates mainly arising from overdue receivables, bouncing cheques and outright default. Defaulter will leave a long chain of victims in their wake and will go on until they get exposed if ever. SME’s therefore need an information sharing system as a risk mitigation method. Such a system would have to be managed by a third party with the requisite knowledge, skills and capacity. Such third parties do exist in the form of credit bureaus but their focus as mentioned above is on the larger corporates.
The market is ripe for an SME focused credit bureau where business can list or share details of bad debtors and serial bad cheque issuers.

Tuesday, November 16, 2010


Do you want to collect debts as a freelancer? collectionafrica.com an affiliate of Credit Reference Bureau Kenya has a home based collection opportunity they are dubbed ‘The octopus programme”. According to their website, you are not required to travel for an interview or pay any application fees. As a home based professional you also be required to have a land line and internet access.

New Scheme Limits Civil Servant's Loans

Samuel Siringi
14 November 2010 Daily Nation

Nairobi — Civil servants will face strict rules on their salaries in a new government move aimed at controlling the loans public servants take.
The government is hiring a private firm to implement a rule that will block all the 460,594 officers from committing more than two thirds of their basic salaries on loans and other forms of borrowing.
The move will affect 246,468 teachers and Teachers Service Commission (TSC) employees, 214,126 civil servants and uniformed staff.
It aims at ensuring staff go home with at least a third of their salaries to cater for living expenses.
The new scheme follows revelations by a survey that some civil servants took up loans and hire purchase schemes that consumed all their salaries.
The study found that the workers were not repaying Sh10 million in monthly commitments since their payslips could not support them.
The deferred payments could have gone up since the report was completed in July.
"This is clearly untenable and gives the service a bad image," said the report, titled Introduction of a Payroll Deduction Management Service.
The government has signed an agreement with Payment Solutions Kenya to develop and run the payroll management service.
The firm will validate all payroll data with a view to verifying employees' credit status before they acquire loans from banks, microfinance institutions and hire purchase organisations.
It will also process loan transactions for deduction according to the one third payroll rule. Individual ministries are expected to provide employee information to the private firm in the new arrangement.
According to the statistics, the amount of deferred deductions in the civil service and uniformed personnel stood at Sh8.5 million in July.
The total amount of deferred deductions for the teachers and staff working at the TSC is Sh2 million.
The most common deferred deductions in the civil service and TSC include bank and Sacco loans, hire purchase and social welfare loans, according to the report.
The report said efforts by the government to activate the provision of the one third basic salary rule by using a payroll system that could not effect any deductions beyond the two-thirds of an officer's basic salary had failed to control over commitment of salaries.

Friday, October 15, 2010


Are you servicing a mortgage, loan or overdraft and may have issues with the way interest rates and other charges are computed? Well, there is an organisation in Kenya named 'Interest Rates Advisory Centre' http://www.irac.co.ke that helps you audit your bank statements, and also helps you seek refunds from the bank where miscalculations  have occurred. I totally agree with them when they state that first hardly anybody queries their bank statement although the banks actually invites you to point out errors within 14 days and secondly most people don't have capacity to pick out even obvious errors. I do not know how effective they are but they do raise important issues. When you recieve your next statement its worth giving it a deeper look.

Monday, October 4, 2010


By SAM KIPLAGAT, skiplagat@ke.nationmedia.com
Posted Wednesday, September 29 2010 at 20:31

If you are planning to commit a debtor to civil jail as form of punishment for defaulting on payment, think again — it is unconstitutional.

In a ruling that is likely to deal a blow to money lenders, a judge ordered the release of a woman who had been committed to civil jail in Murang’a, saying it was against the UN International Covenant on Civil and Political Rights (ICCPR).

According to Lady Justice Martha Koome, international treaties and conventions that have been ratified by Kenya are imported as sources of the Kenyan Law by section 2(6) of the Constitution.

“An order of imprisonment in civil jail is meant to punish, humiliate and subject the debtor to shame and indignity due to failure to pay a civil debt. That goes against the ICCPR that guarantees parties basic freedoms of movement and of pursuing economic, social and cultural development,” said the judge.

Shame and indignity

Justice Koome made the ruling in an application filed by retired civil servant, Ms Zipporah Wambui Mathara, 58. The mother of four had been committed to civil jail for 30 days for failing to pay a debt of Sh339,855 to Mr David Ndungo Maina.

When a person is committed to civil jail, the lender pays Sh60 every day to the prison authorities for subsistence until the debtor is released or settles the debt. This form of punishment has been used by banks and other lenders to punish defaulters.

But Justice Koome said in the ruling that there were other methods of recovering the debt such as attaching the debtor’s property.

Court papers show that Ms Mathara had borrowed Sh42,000 from Mr Maina in December 2008. In an affidavit filed before a Murang’a court, her husband George Mathara says that they became aware of the court proceedings after she was arrested.

Wednesday, June 9, 2010

Cheap Sacco loans face regulator’s axe

Search Amazon.com for saving and creditBy Steve Mbogo - Business Daily

Posted Friday, June 4 2010 at 00:00
The cost of running deposit-taking saccos is set to go up significantly when new regulations come into effect this month, threatening the low interest rates regime that has for decades given the co-operative movement an edge over commercial banks in the lending market.
The regulations covering 220 deposit taking Saccos, also known as FOSAs, with an estimated membership of five million and assets worth Sh150 billion, demands that societies converting from the non-deposit taking to the deposit-taking platform invest in new banking halls and install sophisticated security equipment, including armed security personnel from the Administration Police and private security guards.
The new rules contained in the Sacco Societies Act to be enforced by the Sacco Societies Regulatory Authority (SASRA) will take effect before the end of the month when the Attorney-General publishes them in the Kenya Gazette.
Saccos have a four-year grace period to fully comply.
To ensure Saccos stay within their core business, investments in non-interest earning assets is restricted to 10 per cent of total assets while investments in land and buildings are capped at five per cent, the same ceiling placed for loans to directors and staff.
The rules also demand that investments acquired for expansion be disposed of after two years if they have not been put to any use except with approval from SASRA, which has been granted on-site inspection mandate similar to that exercised by the Central Bank’s supervision department.
Under the new legal regime, Saccos will have to file monthly reports with the authority, indicating their adherence to prudent guidelines.
The regulations have strict corporate benchmarks that include the authority’s administrative sanctions such as prohibition of dividends, expansion, lending, investments or acquisition of property among others when inspections reveal financial mismanagement.
Every Sacco is expected to develop a code of conduct whose violation will result in a fine not exceeding Sh100,000 or imprisonment not exceeding one year or both.
An just like in the banking sector Saccos will not be allowed to charge interest on a delinquent loan exceeding the Principal owed when the loan became delinquent.
Sacco managers said the ending Sacco’s low interest rate lending will deny them the competitive edge in the marketplace, making them vulnerable to competition from commercial banks’ recent foray into the low end of the market – a move that is set to accelerate with the advent of agency banking.
The development could trigger a wave of innovation in savings and lending products as both Saccos and commercial banks attack the same market, but with Saccos seeking to maintain their traditional comparative low interest rate edge.
Low operating costs have for years enabled Saccos to offer low interest rate loans, a factor that has been partly responsible for their exponential growth.
Saccos have been growing at the rate of 25 per cent per year for the last six years, according to data from the Ministry of Cooperatives Development and Marketing.
Early this year, for instance, when banks priced interest on loans at 18 per cent, Saccos charged interest at between 10-12 per cent locking out a substantial borrowing pool from the banks.
This is about to change as the Saccos adjust their operations to comply with new regulations such as the one requiring them to maintain minimum capital of Sh10 million or eight per cent of their total liquid assets.
Sacco managers told Business Daily that they will require members to increase their contributions to raise this amount.
Compliance with this rules means Saccos will be left with less money for lending, and ultimately leave a negative impact on their income.
“Saccos must now start thinking business not just the welfare of members,” said Peter Njuguna, the Chief Supervisory Manager at SASRA. Sacco managers said the challenge is to ensure they bring the cost of operations to a minimum within the four years.
Stima Sacco general manager James Mbui said innovation will drive competitiveness of Saccos because of direct competition from banks when regulations take effect.
“This change brings the professionalism required to make Saccos better financial institutions,” he said.
He said Saccos must innovate savings and lending products that will make their members put in more of their money into them, instead of taking that money to banks and other savings ventures.
Nation Staff Sacco manager, Jacob Kimathi, said competition from commercial banks and the financial requirements of the new regulations could see closure or merger of some Saccos if they do not innovate and cut operating costs.
“The rules are very expensive,” he said. “The era when Saccos provided good dividends may be coming to an end.”
After the rules are gazetted, rebates will no longer be earned on the basis of member savings but on the basis of shares of capital a member has paid for.
Dividends will also not be paid in cases where a Sacco has negative capital, as is the case with banks and listed companies.
Another of the new regulations requires Saccos to charge two per cent above interest rate on loans borrowed for on lending to members meaning that in situations where Saccos have to borrow money for onward lending, they will be under pressure to look for the money whose cost will not result in uncompetitive interest rates.
“This rule assumes that the two per cent margin will take care of all operation costs associated with that loan, which is highly unlikely,” said Mr Kimathi.
He said only very few Saccos in Kenya do not borrow and this will put pressure for Saccos that cannot negotiate attractive interest rates.
According to Mr Njuguna, Saccos will be required to invest in research and development of new products that can offer competition over those offered by the banks.

“They will still need to maintain low interest rates and they can do it,” he said.
One of the options seen as best for Saccos to remain competitive is to invest in information management system that will help reduce their costs of operations which is a major higher interest rates.
New development
For the first time, all Saccos are required to be covered up to Sh100,000 net of any liabilities per depositor to ensure that even in case of collapse, the members will be compensated up to this amount.
The new development is similar to that of deposit protection fund for banks and trusts for life insurance policies.
SASRA will establish the Deposit Guarantee Fund and Saccos will be required to pay annual premium of Sh50,000 or 0.05 per cent of total savings and deposits, whichever is higher.
Analysts said deposit-taking Saccos are required to balance between giving their members high dividends and using part of their profits to improve the welfare of their employees who are now required to have higher financial management skills under the new regulation regime.
Going forward, it means the same factors that have been influencing the level of interest rate for banks are the same that will influence those for the Saccos.
A recent survey by the Monetary Policy Committee of the Central Bank found that the cost of funds, credit risk, administrative costs and Treasury bill rate remain the key determinants of interest rates for banks.
Other factors include competition, interest rate risk, economic growth, liquidity risk, inflation and country risk.
Some of the new regulations that will increase the cost of operations for Sacco include a requirement that Saccos appoint a chief executive officer who will be on a monthly salary unlike today when Saccos are managed by a mid-level manager overseen by elected officials.
The CEO, to be appointed by the board members will be required to have skills necessary for running financial institutions, most probably with post graduate education on financial issues.
Saccos are also required to have an internal auditor in addition to an external one, unlike today when most Saccos opt to retain an external auditor.
This will come at an additional cost.
The Saccos are also supposed to establish an information preservation policy that will involve copying critical information to a memory device and store in fireproof safe on daily basis and store weekly backups off-site.

This will mean outsourcing of archiving services to store off-site vital records such as titles for property, to securities and insurance policies

Wednesday, March 31, 2010

Kenya collateral costs stymie credit access: report

NAIROBI (Reuters) - Financial credit is out of the reach of most Kenyan firms in part because the process of providing securities for loans is excessively bureaucratic and expensive, a report said on Wednesday.

The study, "Cost of Collateral in Kenya - Opportunities for Reform", said the outdated processes invariably increased the costs of borrowing. It called for an overhaul of the "highly fragmented" legal frameworks, including a reform of stamp duty.

"Collateralisation therefore becomes a major deterrent to financial growth as the time and cost involved... means only a small fraction of potential borrowers are able to access finance," said the report.

The study, commissioned by Kenya's central bank and the Financial Sector Deepening trust, said it was imperative land, both urban and rural, becomes a viable source of collateral.

It also called for a unified, fully automated registry system to replace the existing numerous paper-based registries, to cut costs, time and opportunities for graft.

Only a quarter of firms in east Africa's largest economy said they have access to credit, while just 15.5 percent of companies actually use loans, the report showed, only marginally up on the average for sub-Saharan Africa.

"Lack of access to finance remains one of the factors limiting private sector growth," Finance Ministry Permanent Secretary Joseph Kinyua said at the report's launch.

Kinyua said the Treasury would re-assess stamp duty, identified by the report as costly, unfair and a major deterrent to accessing credit.

"Stamp duty is one of those issues we will be looking at in the context of the budget we are preparing. If it is a factor impeding the investment climate in a negative way then we will see what needs to be done," said Kinyua.

The central banks says commercial banks persistently cite the cost of collateral as contributing a significant portion of the premium factored into lending rates. But many Kenyans accuse the banks of greed.

Wednesday, February 17, 2010


Pursuant to the "Credit Reference Bureau Regulations 2008" CBK has finally licensed the first credit reference bureau to offer banking sector credit information sharing services. Note that the licensee shares the same generic name with the regulations. CRB Africa has been existence in Kenya for a while and has a presence in several other African countries. The Company is aslo associated with Collection Africa, a debt collection firm.

The basic function of a credit bureau is to enable banks share information about borrowers for business decision making i.e. credit granting decisions. The bureau also keeps a credit history record of the borrower and can even assign a score related to the credit history.

Good credit scores can ease access to more credit which could be an opportunity for SMEs to access credit without the restrictive collateral requirements.

More on the subject will follow.

Welcoming you and myself back!

After a very very long hiatus, this blog is definitely back.

There have been some developments within the credit industry in Kenya and I seek to keep you updated and informed.