Pay attention to the central bank advice on freezing CRB blacklists

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Editorials

Pay attention to the central bank advice on freezing CRB blacklists


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Central Bank of Kenya. PHOTO FILE | NMG

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Summary

  • The suspension of the blacklist of defaulters with loans equal to or less than 5 million shillings for a year has given great relief to small businesses and individuals affected by the effects of the Covid-19 pandemic.
  • But the directive is a double-edged sword as it could end up denying companies themselves the capital they need to sustain their recovery, serve new orders and expand into new markets.

The suspension of the blacklist of defaulters with loans equal to or less than 5 million shillings for a year has given great relief to small businesses and individuals affected by the effects of the Covid-19 pandemic.

But the directive is a double-edged sword as it could end up denying companies themselves the capital they need to sustain their recovery, serve new orders and expand into new markets.

It can also be used by financially healthier individuals to default in the knowledge that such a move would have no consequence, setting the financial sector for a bad debt spike.

As the Central Bank of Kenya (CBK) has implemented the presidential directive, the banking regulator has warned that commercial banks could start rationing loans after the suspension.

The regulator pointed out that if poorly managed, lenders can avoid individuals and small businesses on a last scale between September 2016 and November 2019, when Kenya capped interest rates.

Such an outcome would end up hurting the economy as a slowdown in lending would jeopardize ongoing recovery efforts. The latest Stanbic Bank Kenya (PMI) Purchasing Managers Index shows that companies increased their workforce for six consecutive months as they continued to recover from the pandemic. Over the past decade, Kenya has developed a credit information sharing mechanism (CIS) for the banking sector which has helped enhance transparency in the credit market.

The mechanism facilitated the development of a credit history for Kenyans to enable them to access cheaper credit. This is especially important for those borrowers who do not have collateral such as title deeds that have traditionally been used to secure credit.

Bankers say a lack of credit references could contribute to higher loan costs and freeze business loans due to incomplete information on borrowers.

Besides the banks, the other big losers will be the credit reference bureaus (CRB), which depend on the quote database for their income.

As implementation of the directive takes off, a balance needs to be struck between assisting small businesses and safeguarding the effectiveness and sustainability of the CIS framework.

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