The linkage between access to credit and the economic development of a country has been made more proficient with the Credit Information Sharing (CIS) mechanism in place, which has created an opportunity for a wider cross-section of the population to access credit, particularly those with no access to tangible collateral.
CIS Mechanism is basically a process where credit providers such as banks, microfinance institutions, and SACCOs exchange information on their outstanding loans and advances through licensed Credit Reference Bureaus (CRBs).
For a while now, the CIS mechanism has been misconstrued for blacklisting, a non-existent word under CRB regulations.
CRBs don’t blacklist a borrower but rather use full-file information sharing to assess a borrower’s credit risk.
There are, however, a number of benefits for borrowers with regard to the CIS mechanism.
- Use of a Credit Report
A credit report makes it easier for good customers to distinguish themselves from persistent defaulters, hence keeping their reputation intact.
2. Better credit terms
Additionally, it consolidates a customer’s positive credit information from various lenders in an official, credible database accessible by both the customer and the credit provider.
This makes it easier for customers to negotiate credit terms on the strength of their good repayment history.
3. Less reliance on tangible collateral
CRBs make credit reports available as evidence of good performance which could translate to a lower cost of credit, flexible repayment periods, and lower reliance on tangible collateral such as land and buildings amongst other preferential terms.
4. Faster processing of the loan
Credit providers have online access to credit reports generated by the CRBs resulting in reduced paperwork for the customer and faster processing of loans.
The need to use 3rd party investigators to confirm details of the loan applicant is eliminated. The costs associated with this called search costs – are no longer passed to the borrower.
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By making credit histories more portable, customers are able to easily change credit providers and thereby, take advantage of competition to secure better credit terms.
CIS Benefits to a Credit Provider
With the mechanism in place, CRBs offer a customer’s information on previous loan repayments in one document called a credit report.
The credit report makes it easier for credit providers to review a customer’s credit or loan application faster and more efficiently to ensure equal and objective treatment of each applicant.
It has helped reduce bad debt and exposure to high-risk accounts and has enabled more reliable data for better decision-making.
Credit officers use the framework to focus more on cross-selling other products and there is also an increased volume of accounts.
As per the Credit Reference Bureau (Regulations) 2020, all institutions approved by the Central Bank of Kenya (CBK) to share credit information with CRBs are mandated to share full files with all licensed CRBs. This data is submitted electronically on both a daily and monthly basis.