Blurred credit information a weakness to digital lending

The employment of mobile applications in the issuance of credit in the country has grown from a relatively non-existent position to become central to the delivery of financial services in Kenya.

According to the recently released survey on financial access dubbed the FinAccess 2019 report by the Central Bank of Kenya (CBK), mobile apps have grown their share of utility to 8.3 percent driving up financial inclusion to a near 90 percent.

In spite of their significant growth rate, the digital lenders carry with them a weak point largely defined by a blur to the units’ credit reporting mechanism.

The average Kenyan, for instance, has an average of six lending accounts including multiple mobile lending applications according to data from the Metropol Credit Rating Bureau (CRB).

Information from the digital lenders is, however, not readily available leaving a number of the digital lenders outside the scope of the credit database heightening over-leveraging risks on consumers.

Tala Regional Manager for East Africa Rose Muturi faults the current nature of credit bureaus defining their core structure as one omitting the algorithm-based credit pricing method. This as CRBs tend to correspond to the conventional lending system which mainly pegs lending to collateral.

“Some digital lenders have tried to partner CRBs but these bureaus are not structured to accept the kind of information we provide,” Ms Muturi told Citizen Digital.

While credit information has revolutionized the issuance of loans, deepening inclusion, Metropol Head of Business Development Christopher Arunga says traditional lenders are yet to fully leverage on available credit information in comparison to their fintech counterparts.

According to Arunga, credit information in Kenya remains plagued by the long-standing misconceptions including the definition of the bureaus as mere bad book registers.

“We are yet to reach a point of appreciating credit scoring. A majority of local lenders do not necessary care for consumer credit scores and only want to find out whether a potential borrower is listed or not,” he said.

The introduction of interest rate caps to commercial lending sparked the rise of digital lending, beginning in late 2016 as the new lenders took up the niche left through the shunning of riskier borrowers by mainstream creditors.

While commercial banks termed individuals and small and medium enterprises (SMEs) as high risk borrowers, the digital lenders saw opportunity in studying behaviour such as credit use patterns to advance credit, though at greater interest rates.

The relatively higher cost of borrowing has since caught up with regulators in recent times prompting parliament to lobby the Central Bank to bring the lenders under the capping regime.

However, Muturi warns of risks to consolidating the digital lenders under the interest caps underscoring their role in credit advancement to riskier borrowers under the depressive credit outlook.

“Our interest rates have taken into account the credit risk exposure of our customers. This dynamic is different from any other conventional banking regulation and hence we wouldn’t fit under the rate cap regime,” she added.

Further to the credit risk concerns, Muturi challenges misconceptions associating digital lenders with the promotion of risky behaviour such as erratic spending and betting, calling instead for empirical research into the claims. While such motherhood statements have been pronounced, available data has failed to back up the utterances.

Only 1.9 percent of participants in digital lending have used acquired funds to bet while a majority of Kenyans have challenged betting as a worth source of income according to the FinAccess survey.

To strengthen credit information and sharing, MMC Africa has lobbied for the creation of a standalone Credit Act to better manage credit information.

“The new model will address lenders apprehensions about credit score consistency across the three main credit bureaus, one other essential safeguard is to preserve the integrity of credit scoring to maintain the integrity of credit scoring so that everyone has a number that accurately determines their credit worthiness,” said MMC Law’s Banking and Finance Partner Jacqueline Wangui earlier this year.

The sentiments were made on the back of CBK concerns over differing formulas to credit scoring by the three licensed bureaus where Governor Patrick Njoroge outlined plans for the creation of a central server for financial technology firms to facilitate the submission of client-credit information.

CRBs were first introduced in Kenya in the 90’s following a major collapse of banks, fuelled in great part by a sharp increase in non-performing loans as the proportion of bad loans grew by an average of 16.5 percent between 1996 and 1999.