A third of Kenyan loan accounts are listed as defaulted with the country’s credit reference bureaus (CRBs) in an economy where Covid-induced job cuts, business closures and runaway inflation have pushed thousands of people into a debt trap.
Central Bank of Kenya (CBK) data indicate seven million of the 19 million accounts listed with the CRBs have been in default, and include 4.2 million linked to mobile phone loans.
Already, the regulator has asked banks to write off half of the defaulted mobile loans estimated at over Sh30 billion, hitting banks like NCBA Group that accounted for 70 per cent of the defaulted phone debt.
The number of defaulted counts has grown by 52 per cent from the 4.6 million recorded in December last year when the CRBs had 15 million unique borrowers on their records.
This signals a worsening cash flow problem for the majority of Kenyans who are yet to fully recover from Covid-19-related economic hardships.
“Out of these 19 million unique borrowers with CRB records, some 12 million have records of performing loans, as at the point when we started this credit repair mechanism,” CBK governor Patrick Njoroge said yesterday during a post-Monetary Policy Committee (MPC) briefing.
The rising number of blacklisted loan accounts will jeopardise the chances of millions of Kenyans being able to borrow more to grow their businesses or for projects.
The volume of loan defaults among banks has remained relatively high this year, touching an all-time high of Sh514.4 billion in June before retreating by Sh22.6 billion to Sh491.8 billion in the three months to September.
The defaulted loans with CRBs stood at 3.2 million accounts in March 2020 when Kenya recorded the first Covid-19 case.
An increase in business activity, coupled with a slight moderation in fuel prices, has helped improve the financial health of borrowers, therefore improving loan repayment rates.
Lenders normally list loan accounts that have been in arrears for more than 90 days as non-performing, with factors such as job losses and high cost of living contributing to individuals’ inability to meet repayment obligations.
The economy has undergone a series of shocks since 2020, the first being the Coivid-19 pandemic which saw more than 1.7 million workers lose their jobs, and small businesses shut down in the face of government-imposed restrictions to control the virus.
As the economy recovered from the Covid hit, the Russia-Ukraine conflict that started in February caused a global rise in fuel and staple food prices, raising local inflation to the current 65-month high of 9.6 per cent.
The high rate of defaults among the country’s loan accounts has been cited as a reason for the reluctance of banks to lend to the private sector in the last few years and their preference for government lending.
A negative credit record results in the borrower being denied loans or slapped with high-interest rates and collateral demands by lenders.
As a result, the CBK has approved risk-based lending plans that will work alongside a credit scoring system.
The expectation is that this will protect borrowers from being locked out of the formal credit market, even those with previous bad loans on their records.
Dr Njoroge said that the regulator expects that the combination of the loan repair efforts and the use of credit scoring will ease access to loans for the private sector.
“There has been concern from members of the public that this could be improved, and we have tightened it working with CRBs and banks…first in ensuring the records are correct, and making sure that the credit score is not the only thing that will be used to ensure that one gets credit,” said the CBK governor. “We have also worked with commercial banks to ensure that they are tightening their risk-based pricing and understanding risk based on a variety of information, including credit score.”
Last week, the regulator asked the three CRBs in the local market – Metropol, TransUnion and Creditinfo International—to include a standard statement at the top of every credit report indicating that “a customer’s credit score should not be used as the sole reason by a lender to deny a customer a loan”.
The reforms in the use of CRB data in lending decisions have taken on new urgency in recent weeks following a directive by President William Ruto that lenders move away from using a negative credit record to deny borrowers loans.
Instead, the President has pushed for the use of the credit scoring system which sees all potential borrowers access credit, with varying interest rates charged depending on the deemed default risk.