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Credit Information Sharing
CENTRAL BANK OF KENYA

A. Problem Analysis

 1. What was the problem before the implementation of the initiative?
a.Unsustainably high level of non-performing loans (NPLs) which posed a threat to financial sector stability. This led to lenders levying a high risk premium, which resulted in high interest rates on loans. Several bank failures were witnessed in Kenya in 1980’s and 1990’s as a result of the unsustainable NPL levels. b.Lack of financial discipline evidenced by existence of serial defaulters, who borrowed from several lenders with no intention to repay. This was made possible by the prevailing information asymmetry. As a result, lenders were not able to effectively assess the creditworthiness of prospective borrowers due to lack of credit information sharing. c.Limited access to credit by borrowers with no physical collateral to provide as security against loans. Low levels of growth in private sector lending.

B. Strategic Approach

 2. What was the solution?
The Credit Information Sharing (CIS) mechanism was proposed by the Central Bank of Kenya (CBK) and the Kenya Bankers Association (KBA). CBK partnered with the Kenya Bankers Association (KBA) in developing the legal framework and sensitising all the players in readiness for rollout the CIS mechanism. The CIS mechanism was aimed at enabling lenders to exchange credit information among themselves to facilitate effective assessment of creditworthiness of the borrowers. Kenyans are known to borrow from several lenders hence the mechanism enables lenders to obtain the history on past borrowings of potential borrowers. Lenders are then able to price loans to borrowers based on their past repayment history. Borrowers with good history are charged lower interest rates and given favourable terms and conditions whereas borrowers with default histories are charged higher risk premiums and more stringent loan terms and conditions. The CIS mechanism has inculcated a culture of financial disciple on the part of borrowers and as a result the non-performing levels have come down to average 5% of gross loans currently as compared to as high as 40% in late 1990’s and early 2000.
 3. How did the initiative solve the problem and improve people’s lives?
The introduction of the CIS mechanism allowed banks to access detailed credit history of their borrowers at a click of button unlike previously when they had to spend a lot of time and money in searching for background information on the part of borrowers. As the CIS mechanism enabled banks to undertake effective credit risk management, the economy benefited from increased lending. Borrowers who were not able to borrow previously due to lack of physical collateral are now able to borrow cheaply using their good credit history as collateral (information capital). The acceptance of the CIS mechanism by both the public and private sector has resulted in enhanced financial discipline on the part of Kenyans. The prevalence of borrowers who borrow with no intention of repaying (serial defaulters) has been minimized.

C. Execution and Implementation

 4. In which ways is the initiative creative and innovative?
a.The Banking Act was amended in 2006 to allow banks to share credit information through credit reference bureaus licensed by the Central Bank of Kenya. b.In 2007, the Central Bank of Kenya invited the Kenya Bankers Association (KBA) to join a CBK team to develop the modalities of operationalizing the 2006 amendment to the Banking Act. As a result, a Joint CIS Task Force with members from CBK and KBA was constituted. c.The Joint CIS Task Force developed the Banking (Credit Reference Bureau) Regulations which were issued in 2008. The regulations detailed the procedures for licensing credit reference bureaus, obligations and responsibilities of banks, credit reference bureaus and borrowers. d.The Banking (Credit Reference Bureau) Regulations, 2008 were operationalized in February 2009. e.CBK licensed Credit Reference Bureau Africa Ltd and Metropol Credit Reference Bureau Ltd as the first and the second CRBs in Kenya in February 2010 and April 2011, respectively. f.CBK officially launched the CIS mechanism in July 2010, with banks being mandated to share negative credit information and positive credit information based on customers consent. g.In 2012, the Microfinance Act, 2006 was amended to include Microfinance Banks in the CIS mechanism. The Central Bank of Kenya Act was also amended to extend the CIS mechanism into a full file information sharing. h.In 2013, the Banking (Credit Reference Bureau) Regulations were revised to include microfinance banks, full file information sharing and more third party sources of credit information to credit reference bureaus. i.The revised Banking (Credit Reference Bureau) Regulations, 2013 became effective from February 2014.
 5. Who implemented the initiative and what is the size of the population affected by this initiative?
The rollout of the CIS mechanism benefitted from the joint effort involving several stakeholders. These included:- •The Central Bank of Kenya as the primary proponent for the CIS mechanism. •The Kenya Government through the Ministry of Finance being responsible for policy direction for the financial sector in Kenya. •The Kenya Bankers Association and the Association of Microfinance Institutions whose members (the commercial banks and microfinance banks) were the targeted main beneficiaries of the CIS mechanism. •Development partners including Financial Sector Deepening Trust, World Bank and International Financial Centre (IFC) who provided technical and financial support for the project. •The public whose credit information was to be shared among the lenders. The buy-in of the public was critical for the success of the CIS mechanism.
 6. How was the strategy implemented and what resources were mobilized?
The main resources used in the CIS mechanism were technical (human) and financial resources. The technical (human) resources were contributed by the Central Bank of Kenya, the primary proponent for the CIS mechanism, and the Kenya Bankers Association. The financial resources were mainly contributed by the development partners (Financial Sector Deepening Trust, USAID, World Bank and IFC - who financed most of the technical assistance), the Central Bank of Kenya and Kenya Bankers Association. The stakeholders readily contributed the various resources when they bought the idea of the important role that the CIS mechanism plays in developing the financial sector.
 7. Who were the stakeholders involved in the design of the initiative and in its implementation?
•An enabling legal and regulatory framework – These are amendments to the Banking Act, Microfinance Act and the Credit Reference Bureau Regulations. •Data submission templates used by banks and other providers of credit information to submit information to the credit reference bureaus. •Credit reports – Credit reference bureaus collate credit data from difference lenders and generate various credit reports and credit scores that are used by the lenders as an ingredient to their credit appraisal processes.
 8. What were the most successful outputs and why was the initiative effective?
•Offsite surveillance by CBK – Credit reference bureaus are required to submit up to 20 periodic returns to CBK on the performance of the CIS mechanism in terms of submissions by lenders, acceptance level, rejections level, credit reports accessed, and complaints lodged among others. These returns are analyzed and reports prepared to inform policy decision on improving the CIS mechanism. •Onsite surveillance by CBK – To complement the analysis of returns submitted to CBK, CBK undertakes periodic inspection of the credit reference bureaus and the banks to confirm adherence to the legal and regulatory framework for the CIS mechanism. •At the initial stages of the CIS mechanism, regular meetings and workshops were held among the key stakeholders to compare notes on the progress of the mechanism. •CBK and KBA established a dedicated project team to continuously engage the banks and credit reference bureaus to ensure smooth operations of the CIS mechanism.
 9. What were the main obstacles encountered and how were they overcome?
•Data quality challenges – Several banks had incomplete or inaccurate information on their customers. This resulted in high rejection rate for information submitted to the credit reference bureaus. This was overcome through continuous updating of records by banks complemented with public awareness sessions to appreciate the benefit of the CIS mechanism. •Capacity Constraints (human resources and systems) – The high costs involved in making the lenders and credit reference bureaus systems compatible and increased human resource needs threatened to derail the CIS mechanism. This challenge was overcome by showcasing the benefits of the mechanism which outweighed the costs. •Limited number of participating credit providers – The mechanism was initially open to commercial banks. This has been expanded to include microfinance banks and plans are underway to include all other credit providers. Since most Kenyans are multi-borrowed, inclusion of most of the credit providers in the CIS mechanism is the only way to derive optimum outcome.

D. Impact and Sustainability

 10. What were the key benefits resulting from this initiative?
•Improved the quality of credit appraisal process by financial institutions hence lower levels of non-performing loans, which stand at 5.4% of gross loans unlike before when it was more than 10%. •Inculcated financial discipline on borrowers, who now borrow when necessary. Serial defaulters are being weeded out. Chances of customer over-indebtedness have been minimized. •Reduced reliance on physical collateral before a customer can access credit. Lenders have started to determine credit terms based on information capital (credit histories). •Recruitment appraisal: Several employers have embraced credit reports as part of their recruitment process. Employers including Government require potential employees to submit their credit reports as part of their applications.
 11. Did the initiative improve integrity and/or accountability in public service? (If applicable)
•The sustainability of the CIS mechanism is entrenched in the legal and regulatory framework. The licensed credit reference bureaus and the participating institutions are required to maintain customers’ information with utmost confidentiality. The instances under which the customers’ information can be shared are enumerated in the regulatory framework. •There is no limit on the number of licensed credit reference bureaus to promote competition and innovation. This will ensure that the mechanism is sustained through rollout of new value-add products. •The mechanism was initially closed ended to commercial banks but has now been expanded to include microfinance banks. Plans are underway to open it up to all credit providers for optimum benefits to be derived. •Kenya has hosted visits from several countries in the region and beyond to learn from Kenya’s experience in rolling out credit information sharing. There are currently plans to establish a cross-border credit information sharing mechanism in the East African Community, which evidences the transferability of the initiative.
 12. Were special measures put in place to ensure that the initiative benefits women and girls and improves the situation of the poorest and most vulnerable? (If applicable)
•Necessity for regular consultations amongst stakeholders in the development and implementation of initiatives. For example, involvement of banks during the review of the data submission template enabled the CBK to incorporate most of their concerns in the development stage. •Need to continuously conduct public awareness to various stakeholders for buy in. •Policy development is important but implementation is more critical. The credit reference bureau regulations took time to develop through a consultative process but the desired traction after implementation required more consultations.

Contact Information

Institution Name:   CENTRAL BANK OF KENYA
Institution Type:   Government Agency  
Contact Person:   Matu Mugo
Title:   BANK SUPERVISION  
Telephone/ Fax:   +2540202863004
Institution's / Project's Website:  
E-mail:   mugom@centralbank.go.ke  
Address:   P.O. Box 60000
Postal Code:   00200
City:   NAIROBI
State/Province:   NAIROBI
Country:  

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