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Regulatory Compliance for Financial Institutions in Kenya: A Key Component of Efficient Credit Intermediation

In order to strengthen financial stability and promote transparency, Section 31(4) of the Banking Act mandates the Central Bank of Kenya to license and supervise credit reference bureaus (CRBs). The Credit Reference Bureau Regulations, 2013, govern the licensing, operation, and supervision of CRBs by the Central Bank, ensuring compliance with regulatory requirements.

Background

Kenya’s banking sector has historically struggled with non-performing loans, leading to the collapse of some financial institutions. A major contributor to this issue was the lack of a credit information sharing mechanism amongst financial institutions, allowing “serial defaulters” to thrive in an environment of information asymmetry.

To address this challenge, stakeholders developed the Banking (Credit Reference Bureau) Regulations 2008, which initially provided for the sharing of only negative information. However, in 2013, revised CRB Regulations were issued, allowing for the sharing of full file information, including both positive and negative credit data.

Benefits to Customers

For customers, access to credit reports generated by CRBs makes it easier to distinguish themselves from persistent defaulters, attracting more favorable loan terms.

Financial institutions have online access to credit reports, reducing paperwork and speeding up loan processing.
Customers can easily switch between financial institutions, taking advantage of competition to secure better credit terms.

Benefits to Financial Institutions

Financial institutions benefit from the Credit Information Sharing (CIS) mechanism by strengthening their credit risk management processes and facilitating faster reviews of customer credit or loan applications.

The CIS also creates an opportunity for a wider cross-section of the population to access credit, particularly those with no access to tangible collateral, reducing lending transaction costs while availing credit through reduced cost of credit and enhanced competition.

Key Provisions

The Credit Reference Bureau Regulations 2013 include provisions that:

Require customers to provide consent for the submission or sharing of credit information
Ensure financial institutions submit both positive and negative credit information to CRBs on a monthly basis
Allow customers to dispute information contained in their credit reports
Accurate credit information is also a critical requirement under the regulations

Conclusion

In conclusion, regulatory compliance for financial institutions in Kenya is crucial for efficient credit intermediation. The Credit Reference Bureau Regulations 2013 have significantly improved the sector’s credit risk management processes, promoting transparency and competition while enhancing access to credit for a wider population.