Kamau Kunyiha, the CEO of CreditInfo Kenya says that lenders need to utilize the vast data source in the Kenyan credit bureaus to enhance their operations.
What is a credit bureau?
A credit bureau is a data centre which holds credit records from primarily financial institutions (banks, microfinance, leasing companies) and various non-credit providers, such as telecoms, insurers, even SMEs. Furthermore, valuable information is gathered from official data-sources and even utility companies, which provide extremely important data on payment behavior. This information is used to help financial and other organisations assess creditworthiness and the risk of non-payment.
The credit bureau holds information on private persons and legal entities. Let’s say if somebody has a very good payment history it can be seen as a very positive indication that they will respect the terms and conditions of a new credit agreement. On the other hand, those individuals or companies that have repeatedly defaulted in the past might be considered as more inclined to default in the future, therefore if there are debts outstanding, then no new credit should be granted. It protects the individuals from becoming over-indebted by having many loans with many lenders and it also protects the lending institution from defaulting debtors, so it works both ways.
In Kenya there have been licensed credit bureaus since 2010, however, things really changed 3 years ago when the full details of credit agreements were shared.
What roles do credit information sharing plays for financial institutions and the larger economy?
A credit bureau provides lenders with greater security and better guarantee that their credit agreements will be repaid. It enables them to grow and nurture a higher quality portfolio of clients, therefore build a more sustainable and less vulnerable business. On an individual level, a credit bureau brings a big opportunity for both private and legal persons to build a good credit history and there- fore have greater access to credit. Often at even better conditions, as the lenders are competing for good and reliable customers.
On country level and in more general terms, credit bureaus facilitate access to credit and this has considerable benefits for the economy. Greater access to credit supports the growth of SME and MSME which at the heart of financial growth. In addition, the lower losses of financial institutions, which means the healthier environment for the economy to grow. This has been proven by many good examples, where the implementation of full-serving credit bureaus has demonstrated economic benefit for the market as a whole. This is one of the reasons why prominent international organisations, such as World Bank and IFC promote the establishment of credit bureaus, especially in the emerging markets. Of course these benefits can only be achieved when lenders transform their businesses to effectively use this data in their decisioning process. This has been proven by many good examples, where the implementation of full-serving credit bureaus has demonstrated economic benefit for the market as a whole. Based on a survey in 51 countries it was seen that the chance of obtaining a loan for SME increased by over 45% when a credit bureau was in the market (Source: Love & Mylenko).
What is your take on the future of financial industry with a robust credit bureaus?
Although the credit bureaus have been sharing full credit histories for 3 years, many of the financial institutions have not yet acted to transform their processes and fully integrate this data into their business. They may have been using negative data for some years, but very few have adapted their systems to use full positive data or credit bureau score. There is a lot of discussion about alternative data, however, most institutions could reduce default rates by at least 20 per cent by fully integrating credit bureau into their processes. This would allow them to more competitive and profitable in the current environment where central bank has applied restrictions on interest rates.
Based on my experience across many markets I believe that over the next 2 to 5 years the full integration of credit bureau will have a significant effect on the way that financial institutions do business, especially with retail or individual customers. This is a major transformation for all lenders and they must start to consider how they will change their business model. Firstly, there will be new types of credit available in particular unsecured credit, then secondly there will be an increase in volumes of new credits, and thirdly there will be new lenders entering to the market. Each of these will have significant effect on the market.
Thinking about the change in products, when no credit bureau is in place, credit assessment is rather difficult and collaterals or help from a guarantor are often necessary. To a great extent the availability of historic positive credit payment information can substitute the need for collateral or guarantor. So I expect to see new credit products that are unsecured. Since many customers do not have collateral or guarantors, the availability of mid-value unsecured loans will result in an increased availability of credit. We have witnessed the growth of micro and nano unsecured loans based on mobile lending, however, there has been very little change in the mid-range at the moment. Finally, the knowledge of how to use the services of a credit bureau is widely known by international credit providers. Because of this when they see an active and successful fully functioning credit bureau in a market they will be more likely to consider entering that market. Thus, there is a clock ticking for local lenders to change their approach in the short term.
Taking all these developments into account, it is key that financial institutions will start to create a roadmap of how to adapt their business to this new environment where high volume, mid value retail loans are a key element of the lending process facilitated by credit scoring and credit bureau. Other data can be used to supplement these decisions. Creditinfo has been very active in developing fully managed multi-data source integrated decision engine with in-house data, credit bureau and mobile and/ or other non-credit data.
What should financial institutions do next?
The first thing that financial institutions should do is to fully reflect and understand what are the changes that a credit bureau will bring to the market, secondly, they need to consider what are the sequence of actions needed to change their business and build this to create a roadmap to follow, to make sure that they benefit from all these significant changes. Very importantly there must be a lot of training in developing the skills and knowledge of the personnel of the financial institutions, so they can make best use of all the new opportunities that are provided by the establishment of a credit bureau. Creditinfo have introduced credit bureaus in many countries and understand the roadmap that financial institutions need to follow in this situation. The type of changes that will be made will be related to the automation of the processes and change some of the infrastructure. Typically they will use credit scoring to best assess the information obtained from the customer and the credit bureau. In addition for many lenders now they will also include mobile banking data and other “alternative data” sources.
What are the implications for those institutions that do not change?
As with any market transformation there will be winners and losers. It has been interesting to watch markets develop after a credit bureau has been implemented. Often those institutions that were the leaders at the start of this process have often lost a significant amount of market share in the subsequent years. I see parallels in an example such as with Kodak where a failure to anticipate the market move to digitalization meant that they lost nearly all market share in a decade.
It is important not to underestimate the impact full data credit bureaus have on the market and the need to change. We have already seen the thought leaders change their processes and start to benefit from the advantage they now hold over their competitors. What we find is that over time all financial institutions will change, however, those that change quicker will have significant benefits both in terms of market share and profitability. With the right experienced support one can adapt and evolve in a safe manner, taking it a phase at a time, with an ongoing improvement. This can be achieved if there is willingness to evolve and correct plans, processes and infrastructure are implemented right from the beginning.
It works in some markets, but is it realistic for it to be the same in Kenya, where we have a very different environment and culture?
It is always important to recognise the differences in local markets and to understand that everything cannot be replicated in exactly the same way from one market to another, however, the overwhelming evidence is that a similar change will happen in this market. To put the question in context, over the last 20 years credit bureaus have been introduced in many diverse markets — from Western markets, to South America, to central Asia, to Eastern Europe. Creditinfo has been actively involved in markets such as Ukraine and Kazakhstan, Kenya, Morocco, Lithuania and now Indonesia. In all of the situations we see the same pattern emerge of the move to new unsecured products, to higher volumes of credit and to the introduction of new competition. The speed of change, the exact nature of the change has varied between all these markets but the overall pattern is the same. It is critical that financial institutions that wish to retain or increase their market share do adapt to the realities of the future market, profit from the benefits that the credit bureau has already brought, and will continue to bring over the coming years.