Njuguna Ndung'u: Increasing access to credit
Keynote address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the
official launch of the first licensed Credit Reference Bureau - CRB Africa Limited, Nairobi,
4 March 2010.
* * *
Chairman, CRB Africa - Mr. Michael Karanja;
Chief Executive Officer, CRB Africa - Mr. Wachira Ndege;
Board Members, CRB Africa, here present;
Chair, KBA - Mr. Martin Oduor-Otieno;
Executive Director, KBA - Mr. John Wanyela;
Chair, Vision 2030 Delivery Board - Dr. James Mwangi;
Distinguished Guests;
Ladies and Gentlemen:
I am pleased to join CRB Africa and the banking fraternity in the launch of the first ever
licensed Credit Reference Bureau in Kenya. The launch marks a new dawn in the Kenyan
banking sector. It is the first and most important step towards building information capital.
The second step will be for the banks and the public to share this information; and the third
step will be to use the information to develop the market and to make appropriate decisions.
I would like to commend the Board and Management of CRB Africa for their enterprising
efforts culminating in their being licensed as the pioneering Credit Reference Bureau in
Kenya. This is a landmark achievement worthy of congratulations from each one of us.
Ladies and Gentlemen: The main objective is to increase access to credit. We know the
benefits of credit access and cost effectiveness of that credit to development at the firm level
and at the household level. Allow me to focus briefly on the benefits which CBK sees as
accruing from the adoption of credit information sharing in Kenya.
First, credit information sharing will facilitate the development of information capital. The risk
premium associated with information asymmetry will henceforth be eroded. This will allow
cost of credit to decline substantially. Second, information capital will change the current
collateral technology. Credit by the banking sector in Kenya has to a large extent been
underwritten by physical collateral such as land and buildings and costs of evaluating that
collateral - with inappropriate definition of property rights. Borrowers without access to such
collateral have been constrained from accessing credit. Credit information sharing will thus
enable borrowers to build a track record (reputational capital) that they can use to access
credit. This will especially be pertinent to those borrowers in the informal and Small and
Medium Enterprises (SMEs) who have a track record and good performance to use their
reputational capital to access credit. The SME sector is very important to the development of
this country as envisaged in Vision 2030.
Ladies and Gentlemen: The third benefit is to enhance information symmetry and support
financial development. The existing state of information asymmetry between borrowers and
banks is a constraint to innovation and financial sector development. Two important
outcomes in information asymmetry are the moral hazard problems from the borrowers and
adverse selection from the banks. These two problems punish the economy with low
provision of credit. Information asymmetry has also led to severe adverse selection among
banks themselves.
Fourth, in a segmented market like ours, some segments remain untapped because banks
do not have adequate information to price suitable products. In part this has also contributed
to the high cost of credit. Borrowers have had to bear a "risk premium" because of this lack of
information. It is therefore the Central Bank's expectation that savings arising from the
increased credit information shall translate to lower cost of credit. In turn, more Kenyans will
be able to access credit from banks.
As you all know, the Monetary Policy Committee's (MPC's) efforts since September 2009 to
signal to the market the need to expand credit to the private sector at affordable interest
rates has not yielded the desired results. Banks have continuously cited structural rigidities
as impeding their wish to lower interest rates. With the launch of credit information sharing,
we believe it signals the seriousness with which their concerns are being addressed. Banks
should henceforth pass the accruing benefits to the Kenyan public through appropriate
reductions in the cost of credit.
Ladies and Gentlemen: The current level of interest rates is a combination of costs (like
information search costs); risk premium most of it unrealized goes to profits; our legal system
with delays and lack of clear enforcement of contracts; and of course banks' profit margin.
High interest rates increase the level of default risks. With good credit track records, the risk
premiums and search costs imposed on customers will ideally shrink. In this regard, we
expect that credit information sharing will be an incentive for good credit behaviour that will
attract competitive pricing of credit facilities. The message to Kenyans is that now more than
ever before, there will certainly be benefits accruing from adhering to the contractual terms of
loans.
Ladies and Gentlemen: In summary, credit information sharing will increase vibrancy in the
market for borrowers and lenders. Borrowers will be able to access enhanced facilities at
competitive prices, as they grow their credit histories and track records. Conversely credit
providers will be able to develop new and competitive products that will tap into previously
unserved and underserved market niches with the power of available information. This can
only impact positively on the banking sector and the Kenyan economy as a whole. The
vibrancy of the credit market implies availability of resources for the productive sectors of the
economy to exploit the otherwise moribund opportunities.
But we should also not forget it is the end of the road for serial defaulters who took
advantage of information search costs and information asymmetry to defraud banks and
individuals - including bouncing cheques for lack of funds.
Having said all that - Ladies and Gentlemen: Let me now take this opportunity to thank our
development partners and donors, in particular, the Financial and Legal Sector Technical
Assistance Project (FLSTAP), Financial Sector Deepening (FSD) Kenya and the
International Finance Corporation (IFC), for their unwavering support over the more than
4 years we have committed our efforts to developing an appropriate credit reporting
mechanism for Kenya. I would also wish to recognise the efforts put forward by the market
players led by KBA who unreservedly partnered with CBK in developing the regulatory
framework and in hosting the Kenya Credit Information Sharing Initiative (KCISI) which has
put in place the modalities of operationalising the initiative.
I urge all banks to support the ongoing pilot run by KCISI aimed at ensuring that all banks are
fully prepared to as seamlessly as possible participate in the sharing of their credit
information. The ability of all banks to participate in the initiative is the only way they will reap
maximum benefits. The project manager and his team at the KCISI have assured me that
they are ready and available to assist all banks to ensure compliance.
Ladies and Gentlemen: The role of easily accessible and affordable credit in economic
development need not be overemphasized. However, most banks finance their credit with
short term deposits which constrains their credit structures to mainly short term. This is even
more punishing because the overdraft facilities for working capital are also short-term and
very costly. We thought with a vibrant bond market, this traditional mismatch would go away!
In an effort to address the mismatch, a Technical Committee has been formed by the CBK to
look at proposals for Development Banking Products or development loans with longer
tenors than the current term loans in commercial banks. Supply of long term funds will
support this line of development. The key target markets for the Development Banking
Products are the SMEs with huge growth potential.
To further address the structural rigidities in pricing of credit, CBK will later in March 2010
launch a study report on collateral system and associated costs in Kenya. The study, jointly
commissioned by KBA, CBK and FSD Kenya, is aimed at establishing the current status on
creation, perfection and enforcement of collateral in Kenya. Recommendations to
overcoming any existing obstacles are expected to be detailed in the study report.
Ladies and Gentlemen: As I draw to a close, I would like to assure you that the CBK in
collaboration with the Government and the market players will enhance its efforts in
addressing other structural rigidities that contribute to market inefficiencies - for this reason,
we would also like to hear from the market as well - to take stock of developments as well as
other emerging constraints.
Ladies and Gentlemen: CBK believes that the banking sector credit information sharing
initiative should serve as a model for other credit and utilities providers. CBK will engage
other players to ensure that we move with speed to rope in other financial and non financial
credit providers. To this end the Microfinance Act was amended vide the Finance Act, 2009
to permit credit information sharing. Inclusion of all credit providers and utility service
providers will allow the full benefits of credit information sharing to permeate through the
whole economy.
Ladies and Gentlemen: It now remains for me to wish CRB Africa all the best as they
commence their operations. We do believe that the licensing of CRB Africa and other CRBs
in future will go a long way in positively altering the Kenyan banking sector landscape. We
want to build strong institutions in the financial sector and information capital is one of the
pillars of a strong institution. As I have emphasized, strong institutions define the appropriate
incentives (punishments) that encourage prudent behavior.
With these few remarks, ladies and gentlemen, it is now my honour and pleasure to declare
CRB Africa officially launched.
Thank you.