Banks to use credit score to evaluate loan application

Financial institutions including banks will soon change from reliance on security to credit score to evaluate whether to approve a loan application or not, Kenya Bankers Association (KBA) chairman and KCB Joshua Oigara has said.

Without giving specific timelines for this, he said that the time is ripe for Kenya to join the rest of the world and reduce the obsession of security.

In this country, any bank will tell you that the best customers are SMEs. They pay their loans well and on time. When you ask them, they will tell you that their biggest hurdle is reliance on security before approving loans, he said.

Banks like Chase Bank, while they had high interest rate at 30 per cent endeared more to customers, especially SMEs that big banks and other financial institutions like KCB which have lower interest rates at 16 per cent.

This dynamic and appetite among SMEs is something the KCB CEO says needs to ring a bell among financial institutions on how they can tap into the potential of SMEs to grow their institutions.

There is something right that Chase Bank was doing. How can you explain such high interest rates yet SMEs flocked there!, he posed.

Chase Bank presented itself as the entrepreneur bank. It provided ease of access to managers, has friendly customer service and its processes are faster like when applying for loans among others.

In most of the development world, like United Kingdom and US, credit score is used because they consider the value of history of a person than security. In these countries, your credit score is calculated based on the information in your credit report. Higher scores reflect a better credit history and make you eligible for lower interest rates.

In Kenya, the Credit Reference Bureau (CRB) has been working on collecting and collating credit information from Kenyans and sharing it with all financial institutions, to further boost their decision making and reduce exposure to non-performing loans.

But CRB has faced its greatest test yet after Mr. Peter Kimani Runo petitioned the National Assembly to amend the Banking Act to stop the use of credit reference bureaus.

“The petitioner avers that credit reference bureaus have listed more than 700,000 individuals in their database as defaulters,”

Mr Justin Muturi, the National Assembly Speaker told MPs while communicating the petition to the House.

Critics have said that despite the over 700,000 listed individuals and other clean Kenyans with good credit scores, commercial banks are yet to pass on the benefits.

Mr Runo claims that the listing of loan defaulters is causing a lot of anguish to the named individuals as they are unable to access financial facilities from local banks and other financial institutions.

According to the Central Bank of Kenya, CRBs help lenders make faster and more accurate credit decisions.
The CRBs collect, manage and disseminate customer information to lenders.

Kenya licensed its first CRB in 2010 in what was expected to lead to lower commercial lending rates by improving credit information availability in the banking sector.

Oigara however challenged Kenyans to check their credit scores to evaluate themselves so as to know whether they are credit worthy or not.


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