Serial Loan Defaulters to Pay More Interest in New Lending Framework

A Metropol stand in a past event PHOTO/Courtesy

Lenders will not deny any borrower a loan but charge them high interest rates if they default to make repayments should the Central Bank of Kenya approve the proposed credit framework.

This new proposal follows President William Ruto’s claims that lenders were denying Kenyans their products due to the credit rating framework that is focused on blacklisting defaulters.

Currently, bad repayment reputation is the reason why most Kenyans are denied loans by lenders.

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However, should the proposed  frameworks pass, credit history, the habit to borrow from multiple lenders and type of job are among the factors that will determine how expensive lenders will charge borrowers.

This means a borrower’s credit history will be the cost of loans; those who repay their loans on time will enjoy low interest rates.

If the new framework is approved, Credit Reference Bureaus (CRBs) will still maintain credit scores for borrowers that will inform different lenders on interest rates to apply.

“We do scoring forward-looking to see your probability of default and, therefore, compute your expected credit loss when you default,” Metropol CEO Gideon Kipyakwai said.

“This enables the bank to then raise the risk and, therefore, load another one or two per cent (on interest rate). The two key attributes will be willingness and ability to pay. If the willingness to pay is not there, it will take time to convert such people.”

Ruto had called for the review of CRB rating to allow introduction of a mechanism that lists borrowers based on their compliance ability.

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The Head of State highlighted the need for the rating formula to open up credit access to the young people who ideally wouldn’t access the capital under the current CRB listing formula.

“…we are going to rework the whole credit rating system. The current one is an all-or-nothing system; you’re either listed as a defaulter, or not. There are some 15 million people listed in the CRB

“We’ll keep the credit reference bureaus, but change the scoring mechanism so that it’s not all-or-nothing,” Ruto said in an interview with Al-Jazeera.

Ruto noted that the review of the CRB listing mechanism will open the door to credit for up to four million people.

“This will now redeem close to four million Kenyans by the beginning of November. When you are blacklisted, you are told you are not a very good person

“This has caused a great loss to many people with some missing out on jobs in addition to exclusion from formal borrowing,” he said.

He also clarified that he was not against the role played by the bureaus.

“It’s not in our position that we are against CRBs. Our position is that we should change the model of listing so that we do not make it an all-or-nothing affair, unfairly disadvantaging borrowers,” Ruto said.

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