Banks, microfinance institutions and savings and credit cooperative societies (saccos) that refuse to lend to borrowers with a negative credit history will face financial sanctions of Ksh2 million ($16,666.66) as President William Ruto’s administration intensifies war against credit starvation in Kenya.

In addition, over four million digital loan defaulters will be expunged from the blacklist of borrowers in data collection agencies effective November 1, marking the beginning of a major shakeup in the operations of the country’ s Credit Reference Bureaus (CRBs).

President Ruto during his inauguration speech on September 13 directed CRBs to review their operating model away from blacklisting loan defaulters to a graduated system of credit score rating.

The president argued that ‘blacklisting’ has ‘unfairly’ excluded millions of Kenyans from the formal credit system and denied others job opportunities.

Banks, however, said failure to share negative information on borrowers will lead to a resurgence of bad loans and hinder disbursement of new loans.

The banks, through their lobby group Kenya Bankers Association (KBA), said full information disclosure on borrowers is important in reducing the extent of information asymmetry between banks and borrowers, which is essential in credit appraisal process.

“Whereas the impact of financial service providers being curtailed from sharing negative information will not be immediate, its effects will no doubt constrain issuance of new credit,” said Habil Olaka, KBA chief executive.

“Banks extending credit without full information about customers’ risk ballooning their non-performing loans, which have detrimental effects on their soundness and stability,” he added.

President Ruto’s push for a policy shift in CRB operations is underpinned by the Banking (CRB Regulations) 2020.

The regulations provide that every credit bureau must develop a credit score for each borrower whose credit information has been submitted and that the credit score must be computed using details and method prescribed by the Central Bank of Kenya.

According to the regulations, credit reports should not be used by financial institutions to deny customers loans but should inform the decision-making process when determining an application for credit.

“An institution that denies a customer a credit facility or any other financial service solely on the basis of a credit score shall be liable to a monetary penalty of Ksh2 million ($16,666.66) or such other sanctions under the Act, the Microfinance Act 2006, or the Sacco Societies Act 2008, as the Central Bank may impose,” the regulations say.

“Each institution shall consider a customer’s credit score in appraising a customer’s credit application and in the pricing of a credit facility.”

CRBs are required retain the credit scores in their possession for at least five years.

By the east African