Credit reference bureaus to help cut interest rates

By Morris Aron

Interest rates are expected to fall and loan terms become more flexible to individuals with a good credit history come July when the first credit reference bureau becomes operational.

Economists and credit experts say that a reduction for those with a favorable credit history should be the natural result of having a consumer credit sharing database, that enables financial institutions assess client creditworthiness.

The prediction follows the recent licensing of the first credit reference bureau in Kenya — Credit Reference Bureau-Africa (CRB-A) — by the Central Bank of Kenya (CBK) with two other credit reference bureaus, South Africa's Compuscan, and Kenya-based Metropol East Africa due for licensing soon.

"The setting up of a credit sharing information network will usher in a new era of competitive interest rate pricing among financial institutions and flexible loan rates as competition for quality customers picks up," said Simon Freemantle, an economist with CfC Stanbic Bank.

Experts say that banks can price their interest rates by not making them uniform for all customers but instead focus on risk-based pricing, a form of price discrimination on different borrowers, as set out in their credit rating with those with excellent credit history enjoying the least interest rates.

Credit history

Banks may also chose to eliminate the premium risk component —what banks charge for not knowing a customer's credit history — from interest rates as the history is captured by CRBs.

Kenya Bankers Association is expected to rollout a nationwide awareness campaign on the operations of CRBs.

The managing director of CRB-Africa, Wachira Ndege, who said the pilot phase of the credit information database that began in February was completed successfully with 100 per cent participation, shared the sentiments yesterday.

"Once fully operational, we are confident that banks will follow suit and reduce their interest rates but a lot will depended on the ability of consumer to negotiate with the banks based on their credit history," said Mr Ndege.

"We have seen banks reduce their base lending rates by 0.5 basis points within a year of CRBs becoming operational in other countries that we have operated in."

The licensing of the first CRB and subsequent roll-out of the a credit information sharing database follows the passing by parliament the Credit Reference Bureau Law in 2008 and enacted the same in February last year.

Under the new regulations, financial institutions are required by law to pass all information regarding non performing loans, as stated in the guidelines put in place by CBK.

Source: The Standard | Online Edition