Credit Information Sharing (CIS) is a process where credit providers (such as banks, microfinance institutions, saccos, etc.) exchange information on their outstanding loans and advances through licensed Credit Reference Bureaus (CRBs). The CRBs are licensed by the Central Bank of Kenya. Through CIS, a lenders accesses reports from the CRB which informs them about the repayment patterns of a borrower. In other markets, CIS is also referred to as Credit Referencing or Credit Reporting, among other terms. In Kenya, as per the Credit Reference Bureau Regulations 2013, commercial and microfinance banks are mandated to share information on their entire loan books, meaning both up to date and late (overdue) repayment details of a borrower are shared. This data is submitted electronically on a monthly basis to the CRBs.
Benefits of CIS
CIS is beneficial to borrowers, lenders and the economy at large in many ways.
Benefits to the customer:
- A credit report makes it easier for good customers to distinguish themselves from persistent defaulters, hence keeping their reputation intact.
- Additionally, it consolidates a customer’s positive credit information from various lenders in an official, credible database accessible by both the customer and the credit provider.
- This makes it easier for customers to negotiate credit terms on the strength of their good re¬payment history. CRBs make credit reports available as evidence of good performance which could translate to a lower cost of credit, flexible repayment periods, and lower reliance on tangible collateral such as land and buildings amongst other preferential terms.
- Credit providers have online access to credit reports generated by the CRBs resulting in reduced paper work for the customer and faster processing of loans.
- The need to use 3rd party investigators to confirm details of the loan applicant is eliminated. The costs associated with this (called search costs) will no longer be passed to the borrower.
- By making credit histories more portable, customers are able to easily change credit providers and thereby take advantage of competition to secure better credit terms.
Benefits credit providers/lenders:
- CIS strengthens the risk management processes used by lenders.
- The character of a customer is important in assisting a credit provider to determine whether the loan will be repaid. To arrive at this, various elements come into play, and these are often summarized into the 5 Cs of credit, namely: Character (integrity); Capacity (sufficient cash flow to service the obligation); Capital (net worth); Collateral (assets to secure the debt), and Conditions (such as the interest rate and amount of principal, etc)
- Assessment of character can be a nightmare where there is no formal, independent source of information on a customer’s management of past loans. This arises because of informa¬tion asymmetry. Information asymmetry means that customers have more information than the credit providers.
- CRBs however offer a better solution. A customer’s information on previous loan repay¬ments with credit providers is made available on one document – a credit report. The credit report makes it easier for credit providers to review a customer’s credit or loan ap¬plication faster and more efficiently.
Benefits to the economy:
- The linkage between access to credit and economic development of a country is clear. CIS creates an opportunity for a wider cross section of the population to access credit, particularly those with no access to tangible collateral.
- The SME sector is an important driver to the industrial development of this country and the Vision 2030. A functioning credit reference system is known to reduce transactions costs in lending to small and medium enterprise (SME) which will have the effect of making credit more available while helping to reduce price not only through reduced costs but also enhanced competition.
- The ratio of Private Sector Credit to GDP will rise, hence improving efficiency in financial intermediation that comes with reduced cost of operations. This would in turn enhance stability of the financial system hence faster economic growth.
Currently, the three licensed Credit Reference Bureaus are:
Transunion Credit Reference Bureau Ltd.
Metropol Credit Reference Bureau Ltd.
Creditinfo Credit Reference Bureau Limited