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Kenya: New Tool Set to Benefit Lending Institutions
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Business Daily (Nairobi)
23 June 2008
Posted to the web 23 June 2008
James Makau
Lenders in the banking sector will soon be able to assess the repayment capability of potential borrowers after the launch of a credit-scoring tool.
The score card will be launched in the next three months by Metropol East Africa Ltd, a credit ratings bureau, and is expected to ease difficulties in pricing and risk assessment which continues to expose lenders to default risks at a time when retail banking has picked up.
"At the moment, we are still at the testing stage, but the tool basically measures the credit capacity of a potential borrower by looking at their behaviour when credit is extended to them," says Sam Omukoko, managing director at Metropol East Africa Ltd.
Through this method, borrowers would be able to take informed decisions on their credit capacity while lenders are able to adequately price risk and mitigate over exposure to defaulters.
"CRB's are really needed in the market place. If you don't have the risk rating right, the cost can put you out of business," says Mr Mike Myers, executive director at Standard Chartered Bank.
Currently, lenders cannot price the risk of a borrower due to lack of a metric that measures risk from an external perspective.
Last year's amendment of the Banking Act compels banks to divulge details about their non-performing loans to credit reference bureaus. But as of yet, the bureaus are yet to be licensed by the Central Bank of Kenya.
"Until this is done, we cannot get data from the banks," says Mr Omukoko.
"The truth is, banks still don't like sharing information about consumers," says Mr Myers.
Accelerated retail lending in countries such as South Korea has led to credit bursts as a result of over-extended credit facilities and lack of consumer education in credit management.
Experts warn that lending institutions' failure to educate borrowers on responsible credit use will lead to massive losses arising from high default payment rates as banks step up lending to individuals.
"More and more consumers are taking credit facilities and loans without understanding the obligations that come with the borrowing," said Wachira Ndege, group operations director at Credit Reference Bureau Ltd.
Mr Ndege said that lending institutions expose themselves to high default risks as they encourage individuals to lend without explaining to them risks that arise with borrowing.
He added that the growth of retail lending in the banking industry has brought with it major credit risks that if not checked will lead to a crisis.
"The default risk from salaried individuals in Kenya is very high," observes Mr Ndege. Most unsecured personal and credit card lending by banks is targeted towards employed individuals with an assured monthly income.
But with the uncertainty of job security and unpredictable interest rates regimes, should clients lose their jobs, or when spikes occur in interest rates, their inability to service their debt obligations will backfire on lending institutions.
Unpredictable rates
A more worrying case for lenders is the current high levels of inflation that might compromise borrower's ability to service debt, made worse by a slow judicial system.
"Most lending institutions blame the judicial system for the slow recovery of debts yet few of them actually go out to educate consumers prior to lending to them," says Mr Ndege.
The information asymmetry between lenders and potential borrowers in Kenya tends to be skewed towards borrowers.
Although lending institutions have tried to employ the Know Your Customer (KYC) concept prior to lending, they still lack enough information on potential borrowers, limiting their ability to assess default risk.
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And in the advent of increased retail lending, the need for better client credit scoring methods is needed more than ever before by lending institutions.
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