Friday, November 25, 2011

THE ZERO EMERGENCY FUND

The conventional financial advice is that if you are employed or earning some income you need to put aside some cash for emergencies; for example loss a job, medical emergency etc. Personal finance experts advice that you keep 3 months to 6 months equivalent of monthly liabilities if form of cash.
While it a good idea to set aside some cash for a rainy day, the whole idea of holding such cash needs to be rethought. Failure to have such amount of cash saved does not necessarily constitute a crisis. So if you haven’t, don’t worry too much because what really matters is your overall financial flexibility, that is; resources you can command too help you withstand a crises, however unexpected, severe or long lasting for the following reasons.

1. Emergency funds take time to accumulate

With the tough economic conditions especially the biting inflation, household budgets are becoming tighter and tighter. With the numerous financial obligation and spiraling costs saving even a small amount is becoming a challenge and thus an emergency fund is hardly a priority. If at all you manage to save anything at all, it will be minute and will take you ages to actually save 6 months worth of living expenses cash.

2. Unacceptably high opportunity cost of funds

Like mentioned above, your budget will have some priorities which are important for your overall financial well being. Items such as debt repayment, retirement saving, sacco savings and investment in a income generating venture will definitely have a higher priority than putting aside an emergency fund. Basically, you have more to gain from making such investments than having money sit around.

3. Non emergencies become emergencies

With idle cash in the bank, issues which you would not ordinarily consider emergency will become emergencies. For example when your idiot brother gets arrested and people look up to you to bail him out, if you don’t have money you will state that fact and suggest creative ways of raising the money. With idle cash lying in the bank creativity will feature less and you will just want to get on with your life. Of course your brother will never pay you back.

Emergencies and financial crises can be managed by first having access to a credit line. That means you have a good financial reputation and you have been paying your debts promptly, be it to your friends, family or even financial institutions. Another way of dealing with emergencies is to liquidate some assets you may have invested in such as real estate or sacco savings. Yet another way to manage emergencies is by risk transfer which is basically use of insurance. Personal accident, comprehensive car cover, fire and burglary and especially medical insurance for your family can help you ride some of the difficult times.

Therefore if you have the above mentioned basics in place and a zero emergency fund, you can sleep easy despite what the experts insist.

Friday, November 4, 2011

CBK ORDERS BANKS NOT TO BLACKLIST DORMANT ACCOUNT HOLDERS

By George Ngigi November 4  2011 Business Daily

Banks should not blacklist customers whose dormant accounts run into negative balances, the Central Bank of Kenya (CBK) has said.
“Failure to close a bank account does not in itself amount to defaulting on a loan. However, it is important to note that credit facilities that had not been fully serviced or regularised when they became dormant may amount to non-performing loans,” said CBK in response to questions by Business Daily regarding the matter.
Customers have accused banks of blacklisting dormant account holders whose balances slip into negative figures due to standing monthly charges.
The lenders then deny the account holders access to credit, effectively lumping them in the category of loan defaulters.
CBK has asked banks to adhere to conditions stipulated in the Credit Reference Bureau (CBR) regulations.

Take advantage
Bank customers should take advantage of the free credit report copy that they are entitled to each year to check any inaccuracy, CBK said.
Credit reference regulations allow customers to raise complaints in not more than 100 words on inaccuracies in the report.
The Kenya Bankers Association (KBA) intends to set up an office of an ombudsman to arbitrate conflicts between banks and customers.
Sharing of borrowers’ loan repayment history started in July last year with the aim of cutting out serial defaulters.
The system is expected to develop to levels where information on dormant accounts will be relevant but not necessitating black-listing.
“As Kenya moves towards comprehensive credit information sharing, the financial profile of customers will become more pertinent.
In comprehensive credit information sharing systems, information on account operations such as dormancy is a consideration,” said the CBK.
The credit bureau system has specialised in gathering information on loan defaults, limiting wider public benefits that could accrue from the body and undermining some reasons for setting it up.
One of the reasons for creation of the body was to allow clean borrowers to access cheaper loans under less stringent terms.
KBA said it was working on modalities to encourage sharing of data on performing loans by next June.
Bank customers have also been asked to update their personal data so that letters on their being black-listed reach them.

Wednesday, November 2, 2011

BANKS SEEK ARBITER OVER LOANS BLACKLIST DISPUTES

By George Ngigi  November 1  2011 at  BusinessDaily

Bankers will create an ombudsman’s office to address customer complaints regarding use of credit referencing bureaus (CRB), the industry lobby organisation has said.
The Kenya Bankers Association (KBA) said the office will arbitrate on emerging issues on use of CRBs, such as the reported blacklisting of customers whose dormant accounts had fallen to negative balances due to accumulated bank charges.
Some bank customers have also claimed they were black listed due to erroneous reconciliation of loan accounts, and did not have an avenue to have their issues resolved.
“We are proposing amendments to the CRB regulations to introduce the office of an ombudsman who will listen to customer disputes that may not be resolved by the CRB and commercial bank as provided for under the current regulations,” said the KBA chief executive, Habil Olaka.
The credit reference regulations currently allow customers to raise complaints in not more than 100 words of the aspects that he/she considers inaccurate in his report.
The credit bureau is required by law to insert the statement to the borrower’s credit report while the reporting bank investigates the complaint in a maximum period of 15 days.
If erroneous, the CRB deletes or amends it and within five days of having received the resolution notice, inform everyone who has accessed the report over the previous twelve months.
But if no agreement is reached, the complaining customer will now appeal through the office of the ombudsman whose ruling will be final.
“The decisions of the independent ombudsman will be binding on the banks,” said Mr Olaka.
Mr Olaka saidthe association was preparing guidelines to be issued to banks clarifying on what constitutes a credit facility in order to prevent any misuse of the system.
The latest Central Bank quarterly report indicates that commercial banks had requested 1,060,865 credit referencing reports by end of September indicating increased reliance of the reports in the process of loan appraisals.
An individual is entitled to one free report in a year and to a free copy of the report within 30 days of being notified of their listing. By end of December 2010 only 434 credit reports had been requested by customers against 284,722 made by banks.
“The challenge is to increase public awareness on the credit information sharing mechanism and the right to access a free credit report from a licensed bureau at least once a year by customers,” said the Central Bank industry report for the year 2010.
Kenya Bankers association said it had also noted that much more sensitisation is required to assist all parties -lenders, borrowers and credit bureaus-clarify any grey areas and hence would be rolling out an awareness campaign early next year.
Currently there are two registered credit reference bureaus in the country being CRBAfrica and Metropol Bureau.

Tuesday, November 1, 2011

BANKS DENY DORMANT ACCOUNT HOLDERS ACCESS TO NEW LOANS

By George Ngigi  October 31  2011 Business Daily

Thousands of consumers who did not formally close previously held bank accounts have been included in the list of bad borrowers, adding a new twist to commercial banks’ use of credit reference in the lending market.
The lenders said the consumers are being penalised for maintaining negative bank balances that add up to loan defaults, qualifying them as bad borrowers in the credit market.
Also included in the list of bad borrowers are bank customers who have applied for credit cards but have not activated them — making it impossible for the banks to recover the initial cost.
Kenya launched the credit referencing system last year to profile borrowers based on their loan servicing history as well as their dealings with utility companies such as water and electricity distributors.
Some commercial banks acknowledged encountering similar problems when evaluating their clients for loans and advised them to clear with the banks that shared negative information before continuing with negotiations.
“People have been put there unnecessarily. Some credit officers in the industry think CRB is a correctional measure for all that has gone wrong in the past but that is not the case; it is worse because it denies one access to credit,” said Jacob Ogola, head of credit administration at Commercial Bank of Africa.
Banks have been increasing their reliance on credit reports with most demanding that all loan applications be accompanied by findings of the individual’s or business report.
The latest Central Bank quarterly report indicates that commercial banks had requested 1,060,865 credit referencing reports by end of September.
“The reports are now part of our credit appraisal process and negative listing is considered on a case by case basis,” said Suprio Sengupta, the general-manager at I&M Bank.
“For personal financing, it becomes crucial but on secured loans it is negotiable,” he said. 
The credit referencing guidelines for the banking industry indicate that lenders are expected to put more emphasis on each borrower’s character than their ability to repay or even to raise collateral.
The CRB report is deemed to reflect the borrower’s character.
Consumer complaints
Credit reference bureaus admitted receiving consumer complaints over dormant account-related blacklisting but said commercial banks had submitted the information to the bureaus.
“We are aware of cases where a customer left his or her account dormant and it went into negative balance not necessarily because of failure to service a loan but for overdrawn bank charges,” said Sam Mukoko of Metropol CRB.
“This is the group of customers who are being taken by surprise when they apply for a loan.”
Wachira Ndege of CRBAfrica, one of the first credit reference bureaus to get Central Bank licensing, said such surprises should not occur as commercial banks are expected to inform a person of his/her listing in the bad borrowers’ book within 30 days of registering a person as a defaulter with the credit bureaus.
Mr Ndege said the requirement is expected to elicit a response from the listed borrower and set in motion a process to correct any errors in the report.
“A customer can also request their status report and if there is any error a resolution procedure is in place,” said Mr Ndege.
An individual is entitled to one free report in a year and to a free copy of the report within 30 days of being notified of their listing.
Mr Wachira said that the law only provided for listing of individuals on the basis of outstanding debt obligations on a facility and not as a result of bank charges.
Mr Mukoko said that customer complaints had led some banks to write special letters to the bureaus asking them to review the status of the complainants.
CRB stands as one of the most outstanding banking sector reforms in Kenya for its provision of credible information on customers that has helped improve the quality of loan books.
Kenya’s stock of gross non-performing loans (NPLs) declined by one per cent in the three months to September to stand at Sh57.7 billion.
Similarly, the ratio of gross NPLs to gross loans improved from 5.4 per cent in June 2011 to 4.8 per cent in September 2011 — a development that has been partly attributed to the use of the credit reference mechanism.
 “The reduction in non-performing loans is attributed to enhanced appraisal standards deployed by banks,” read the Central Bank’s report.
“Someone who has been listed cannot get a loan until they clear with the CRB first,” said James Mwangi, CEO of Equity Bank.
Blacklisted consumers are considered to be of higher risk and can be charged a higher premium than other borrowers. On the other hand, borrowers with a good repayment history are expected to use their rating to negotiate better interest on their loans as they are perceived to bear a lower risk of default.
Evidence from the lending market, however, indicates that no lender has used the credit reference information to vary interest rates for their customers though the bad book is being widely used to deny consumers access to credit.
Some lenders also responded to the bad ratings with requirements that the borrowers raise more collateral for their loans even when they have been cleared by institutions that had listed them.
It remains each bank’s prerogative to determine the amount of risk exposure it is willing to take but most have chosen to simply reject loan applications from such customers.
Before listing a person, a bank is required to give a 30 days’ notice for the individual to take corrective measures.
But once listed, even if a person clears the debt for which they were listed, their names remain in the bad register for seven years.
“Some banks are denying these people credit and that should not be the case,” said Mr Ogola.
“They should instead be priced higher and be required to settle the loan for which they were blacklisted before disbursement of the new loan.”
Mr Ogola said the law gave the allowance in recognition of the fact that conditions in a client’s life at the time of default may have changed, placing them in a better position to service a higher loan while offsetting the previous one.
Staff turnover in the industry was also cited as necessitating further investigation into historical information in an account for a comprehensive reconciliation before listing.
Industry insiders also blamed lack of public awareness and the failure by customers to challenge the banks for the casual manner in which the lenders are using the credit reference information.
Closing their accounts
Mr Ogola advised borrowers to follow due procedure in closing their accounts instead of leaving them dormant even where they felt aggrieved.
Initially, those who were locked out by the banks could turn to microfinance institutions but in his Budget speech in June, Finance minister Uhuru Kenyatta sought to have the MFIs included in the information-sharing platform.
Other service providers including the Nairobi City Council have sought to be included in the credit referencing – especially aiming to list land rates defaulters.
The Higher Education Loans Board is already using the services of the bureaus.
The industry regulator hopes that the goodwill of non-defaulters would not only attract lower cost of credit but also eliminate the need for collateral, making it easier to deepen financial inclusion.