Central Bank of Kenya. FILE PHOTO | NMG The suspension of black listing of defaulters with Sh5 million loans and below for a year has given small businesses and individuals hurting from the effects the Covid-19 pandemic a major relief.
But the directive is a double-edged sword given that it may end up denying the same businesses the much-needed capital to support their recovery, service new orders and expand to new markets.
It may also be used by financially healthier individuals to default knowing that such a move would not come with any consequence, setting up the financial industry for a spike in bad loans.
As the Central Bank of Kenya (CBK) effected the presidential directive, the banking sector regulator cautioned that commercial banks could start rationing loans after the suspension.
The regulator pointed out that if mishandled, lenders may shun individuals and small businesses at a scale last witnessed between September 2016 and November 2019 when Kenya capped interest rates.
Such an outcome would end up hurting the economy since a slowdown in lending would jeopardise the ongoing recovery efforts. The latest Stanbic Bank Kenya’s Purchasing Managers Index (PMI) shows that companies increased their workforce for six months in a row as they continued to recover from the pandemic. Over the last decade, Kenya has developed a credit information sharing (CIS) mechanism for the banking sector that has helped boost transparency in the credit market.
The mechanism has facilitated the development of a credit history for Kenyans to enable them access cheaper credit. This is particularly 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 reference could contribute to soaring costs of loans and stall lending to businesses due to incomplete borrowers’ information.
Besides banks, the other big losers will be the credit reference bureaus (CRBs), who depend on the listing database for their income.
As the implementation of the directive takes off, there is need to balance between providing relief to small businesses while safeguarding the effectiveness and sustainability of the CIS framework.
