Credit Reference Bureau (CRB) Explained

Introduction

In the past, borrowers had to give lenders proof of their creditworthiness before they could borrow money. This involved face to- face meetings, visits and lots of paperwork, so it took a lot of time and effort. Due to information asymmetry, lenders were never sure that borrowers were providing all the information needed to make a good decision. As a result, they often lent money to unsuitable borrowers and sometimes refused to lend to creditworthy people.

However, today’s lending practices have changed and embraced technological innovations in the assessment of credit worthiness. Credit referencing is one of the tools that have been developed to provide credible and fast results on credit scoring. These services are readily available from Credit Reference Bureaus (CRBs).

A CRB is an independent organization that holds information about economic entities (consumers, businesses), to help organizations decide whether to give them credit. They are information brokers, providing creditors with reliable, relevant and comprehensive data on the repayment habits and current debt of their credit applicants. Under reciprocity agreements, credit bureaus obtain data from creditors and other sources, consolidate and package information into individual reports, and distribute it to creditors for a fee.

Some important terms used in Credit Referencing.

Credit - Refers to the borrowing and lending of money. The ‘price’ of credit is set as an ‘interest rate’, which is the fee the borrower pays to the lender.

Credit Scoring- Assessment of the ability to meet financial com­mitments particularly to re-pay debt.

Credit Report (or file) -Information a credit reference agency holds about a person or business. It details credit history, identification information, credit accounts and loans, bankruptcies and late payments, and recent inquiries.

Negative Information – any adverse customer information relating to a customer. Example include proven cases of frauds, forgeries, cheque kiting, false declarations and statements, receiverships, bankruptcies, liquidations, false securities among others.

Searches which leave ‘footprints’-‘Footprints’ are marks left on the database each time a search is made, detailing which company has accessed the database, when and why. These ‘foot prints’ are important because they allow lenders to identify ‘abnormal activity’.

The legal framework CRBs

Many countries in the world have CRBs that work in similar ways. However, they are all slightly different. Some are publicly owned monopolies, some are owned by the banks. Some countries only allow public information (such as court judgments) to be shared. Some allow both public and private information to be shared, but they restrict private information to credit account ‘defaults’. (A default is an account the consumer has broken the terms of.)

In terms of the information held by CRBs, they come from several sources but falls into two main categories – public information and credit account information.

a)    Public information

The public information includes but not limited to:

• Information from the full electoral roll/register, which electorates give to local electoral bodies. CRBs can acquire copies of the full electoral roll and make this available to lenders for certain limited purposes such as assessing credit applications, identifying customers and helping to prevent fraud.
• Court judgments.
• Bankruptcies, individual voluntary arrangements and administration orders.

b)   Credit account information

In many countries, the major lending companies have agreed to share details of their customers’ credit agreements. This means that when someone applies for credit, the lender can check they have repaid other lenders in the recent past or are repaying current credit agreements. They can also check how much the consumer already owes to other lenders and how they are managing these existing credit agreements, to help them decide if the consumer can afford to take on further credit.

For the lenders to see each other’s information, they store information about their customers with CRBs. The CRBs act as a go-between in the sharing process but do not own the information. However, the sharing of information must be consented by the customer. This occurs when consumer give the lender permission to share information with other lenders through the credit reference agencies; and it includes details about the application and about any credit the lender then grants.

As a result, the credit account information is simply a copy of the information all the different lenders hold. These lenders update our database each regular basis.

CRBs do not include information about other people who happen to live with you in your credit report, even if you share a surname, unless a financial connection has been created. This means other people’s credit details should not affect your credit rating.

On financial connection, the credit report should only include:

• Financial information about the person;
• The name of anyone you have a financial connection with at your address (but not any financial information about that person); and
• The date and source of the financial connection.

However, a person will be treated as having a financial connection to someone else where a lender tells the CRB that:

• Application for credit has been made in joint names.
• A bank account or other credit product has been opened in joint names; or 
• The borrower has told the CRB that (s)he financially linked to someone else.

Credit reference services in Kenya

Introduction:

The operatinalization of the Banking (Credit Reference Bureau) Regulations, 2008 on 2^nd February 2009 paved way for the establishment of Credit Reference Bureaus in Kenya. Since then the Central Bank of Kenya licenced two CRBs, that is Credit Reference Bureau Africa Limited and Metropol Credit Reference Bureau Limited. Both bureaus have their Kenyan offices located in Nairobi.

Today, all Commercial banks and the Deposit Protection Fund Board (DPFB) share negative credit information on their customers with licensed credit reference bureaus (CRBs). In the year 2011, provisions were further introduced in respective legislation governing Micro-Finance Institutions (MFIs) and SACCOs to introduce sharing of credit information, although relevant regulations are yet to be prepared.

Activities of CRBs in Kenya

The activities of Credit Reference Bureaus in Kenya are contained in the Banking (Credit Reference Bureau) Regulations, 2008. The bureaus may also engage in the following activities:

1. Collection, collation, storage, management, evaluation, updating and dissemination of customer information as provided by the regulations
2. Other services including, but not limited to:

• Credit worthiness assessments, credit scoring and portfolio risk management tools as reviewed and approved by the Central Bank of Kenya (CBK).
• Verification of credit application information and credit application processing
• Cross-default notices or “watch services”
• Data storage and statistical research
• Debtor and guarantor tracing services with respect to funds lawfully due
• The sale of literature, software and other material related to its activities
• Collateral registry services
• Employment, income, address and asset verification services
• Fraud prevention and detection
• Such other activities as may be approved by the Central Bank in writing.

While CRBs can undertake a number of activities to note the following points. A Credit Reference Bureau:

• Does not make lending decisions. This is a preserve of the lenders and can even lend to borrowers with poor credit history. However, lending to a person who was previously listed as defaulter should be done with extreme caution.
• Is not told which applications are successful or refused, and do not know why a consumer was refused credit.
• Do not hold a ‘blacklist’ of people who should not be given credit.
• Holds information that usually helps people get credit.

Recourse for denied credit facility

On  decision of whether to lend or not, it should be known that there is no automatic right to access credit. However, the law permits the right to demand access to your CRBs. In circumstances when the borrower feels (s)he was refused credit unfairly, the borrower can ask the lender to explain the main reason for denial as well as whether the CRB’s information was the reason for the decision.

 A borrower has the right to write to the CRB and ask for a copy of credit reference file. The  Bureau should be provided at with the following details:

• Your full name; 
• Any other names you have used or been known by in the last six years eg your maiden name;
• Your full address including postcode;
• Any other addresses you have lived at in the last six years;
• Your date of birth; and
• A payment of fee for the services rendered.

Consumers disputing the facts of a transaction in their credit report, who are not satisfied after the mandatory investigation by the CRB with the data provider, may petition the CBK in writing asking it to make a final determination of the dispute. Consumers which appeal undertake to accept the determination of the CBK as final. The CBK may assign arbitration committees to review on its behalf such final appeals by consumers.

Benefits of Credit Reference Services

“If you don’t pay by ……… you will be blacklisted in the credit reference bureau” this is a common statement being used by most debt recovery staffs in most organizations. CRB has been painted as a Monster that has no good to the economy other than to threaten defaulters to pay their bills and debts. This kind of thinking is retrogressive and will only do harm to the economy.

Credit Reference bureau benefits both the lender and the borrower and it is a tool that can bring benefits to the world economy. In developing countries the CRB concept is very new and has not been widely accepted but with an increase in defaulters, it is gaining momentum but at a slow pace.

The benefits of a CRB should be a win-win situation that enables lenders to access good customers and also for customers with a good credit history to obtain credit at better terms. The benefits that accrue from a CRB are;

• Through collecting, managing and disseminating customer information, credit bureaus help lenders make faster and more accurate credit decisions.
• Credit bureaus enable lenders to lend to more and better risk clients (avoiding dead beats) and to determine better (and lower) the bad loan spread that they need to cover expected losses of credit to good payers;
• Credit bureaus reduce the borrowing cost by forcing creditors to be more competitive for good borrowers. Those lower costs for good credit risks motivate those borrowers to be more careful with repayment;
• Credit bureaus reduce moral hazard by developing a credit culture where they operate as borrowers become aware that credit market becomes aware of their credit history and rewards or punishes them accordingly.
• Good credit scores can ease access to more credit, which offer borrowers opportunity to access loans without restrictive collateral requirements. The CRBs have opened up the lending environment and even facilitated the issuance of cheaper loans to borrowers.
• Improved revenue collection. Recent studies indicate that there has been a strong positive response from borrowers who are in default with significant collections from such clients.
• Fewer defaulters. The listing of defaulters creates strong incentive to pay debts.

Challenges facing CRBs

Among the obstacles that have faced CRBs in Kenya since inception include:

• Low levels of data sharing among formal sector financial institutions. The financial sector Deepening (FSD) progressive report 2008-2011 indicated that information sharing was less than 5% of the consumers who had formal sector credit agreements.
• The current regulations prevent the information received from banks from being shared with any other party. This removes the incentive for such entities to contribute their own data, or to allow banks access to their data. This will have a negative impact on banks’ credit risk management, as well as on the expansion of credit information sharing.
• Increasing public resistance against information sharing as only negative information is shared. This resistance has contributed by the fact some borrowers have refused credit on the basis that they have a ‘negative credit record’.
• Successful litigation against information sharing based on privacy considerations.
• Low level of participation in querying the data base. This is to the lack of automation and sophistication in the credit appraisal systems and methodology applied by many organizations.
• Credit referencing system could be viewed a “debt collection mechanism”, which is likely to have negative consequences for the manner in which it evolves.

The future of CRBs

With the passing of number amendments to legislation governing the operations of CRBs, the future looks bright. For instance, the amendment to The Finance Bill 2012/2013 mandates banks to share both negative and positive information. This will be a big reprieve to good borrowers as they will able to benefit from lower interest rate, easier terms and/ or less collateral. Having said that, it is worth noting the concept of CRB is still new in Kenya. To foster faster growth, it is important that the all the stakeholders continue to provide solutions the growth of the CRBs in Kenya. This will include, but not limited to, following:

• The CRBs should spearhead consumer education programme that  is committed to raising public awareness of the information that credit reference agencies hold, how lenders use it and the rights people have in relation to this information. Such campaigns may come in the form of; press interviews, talk shows, involvement in financial literacy projects and offering leaflets on credit reference free of charge. The CRBs should also to provide a free Credit Report at least once a year for all customers held in their data base as required by law. In addition, the existing CRBs should make easy to access of credits especially for people residing outside Nairobi.

• Customers’ information held by financial institutions and other CRB subscribers should be constantly reviewed. There is need to ensure that accurate and update information is relayed to CRBs. This will prevent customers instituting unnecessary legal proceeding that could be as a result of inaccurate and obsolete information.

• All customers should be encouraged to make full and truthful disclosure of facts and information in applications and contracts with third parties when seeking credit of any nature. Attempt to provide false information for any gain whatsoever my result in negative information that is likely to taint one’s character as the information will obviously be CRBs.

• The law governing information sharing should be amended to permit cross-industry information sharing. This would substantially improve the value of the credit referencing system in respect of prevention of defaults as well as in the prevention of over-indebtedness. It would also enable the credit referencing system to make a positive contribution to financial inclusion.

Conclusion

CRBs have provided a convenient platform for information sharing by many financial institutions. They not only provide necessary information for credit assessment, but also allow borrowers to take their credit history from one financial institution to another, thereby making lending markets more competitive and, in the end, more affordable.

They assist in making credit accessible to more people, and enabling lenders and businesses reduce risk and fraud. Sharing of information between financial institutions in respect of customer credit behavior, therefore, has a positive economic impact.  

Adopted from: KENYA SCHOOL OF CREDIT MANAGEMENT 


The Central Bank of Kenya has licensed the following Credit Reference Bureaus whose details are:

Creditinfo Credit Reference Bureau Limited Physical Address: Spark Suites, Suite 12, 2nd Floor, Parklands Road, Nairobi Postal Address: P.O. Box 38941 – 00623, Parklands Email: info@creditinfo.co.ke Date Licensed: 29th April 2015

Credit Reference Bureau Africa Limited Physical Address: CRB Centre, Prosperity House, Westlands Road, Off Museum Hill, Westlands Postal Address: P.O. Box 46406, 00100 NAIROBI, KENYA Telephone: +254 (0) 20 3751799/3751360/2/4/5 Fax: +254 (0) 20 3751344 Email: info@crbafrica.com Website: www.crbafrica.com Date Licensed: 9th February 2010

Metropol Credit Reference Bureau Limited Physical Address: 1st Floor, Shelter Afrique Centre, Upper Hill, Nairobi Postal Address: P.O. Box 35331, 00200 NAIROBI, KENYA Telephone: +254 (0) 20 2689881/27113575 Mobile: +254 727 413 733/ 732 774 666 Fax: +254 (0) 20 273572 Email: creditbureau@metropol.co.ke Website: http://www.metropolcorporation.com Date Licensed: 11th April 2011