Tuesday, January 25, 2011

MFIs seek access to data on serial loan defaulters

By George Ngigi
Posted Monday, January 24 2011 at 00:00

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.

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