NAIROBI, Kenya, Mar 11 – A credit-rating tool that will enable lending institutions to determine the credit-worthiness of a borrower has been launched in the market.
The tool dubbed ‘M-score’ and which has been developed by Metropol East Africa, will enable an institution to look at an individual’s credit transactions profile and decide whether or not to extend loans and what interest rates to charge.
“This credit-scoring tool will harness the (credit) histories of individuals within or outside the banking system,” explained Metropol Managing Director Sam Omukoko on Wednesday.
Banks have been blamed for failing to put structured systems in place to enable people to access credit. It is estimated that only about 40 percent or six million people who have access to financial services, can receive loans from these institutions.
This is because there has been an over-emphasis on collateral, which means that banks don’t look at other important factors that would enable them to make a good assessment of the credit worthiness of a borrower.
Mr Omukoko said that the M-score would have four parameters; namely an individual’s credit history, earning capacity, contact details and personal identification, which would be used to calculate a borrower’s performance.
“It ranges from 200 to 900 points. This means that the minimum score you can obtain is 200 points, while the maximum is 900. The cut-off score is 400 points. Scores above 400 points indicate your credit worth is progressively acceptable to lenders,” the MD explained.
He told a press briefing that the system where individuals are initially required to create a profile with the company would help unlock the borrowing capacity of many people, particularly those in the Small and Medium Enterprises Sector, which would in turn contribute to the growth of the economy.
Mr Omukoko argued that with a good score, individuals would be able to negotiate better terms such as lower interest rates, flexible repayment rates as well as relaxed collateral requirements.
While lauding the move, Kenya Bankers Association (KBA) Executive Director John Wanyela hoped that through the initiative, many Kenyans would embrace the need to have their credit worthiness assessed so as to reduce the need for lending firms to rely on collateral as a pre-condition for giving loans.
“The coming of this tool will assist us in managing our bad debt portfolio. We should be relying on our own credit records to sell us to the providers,” he added.
Pointing to the collapse of many institutions in the 1990s under the weight of debt due to the high loan default ratings, Mr Wanyela impressed upon Kenyans to embrace a ‘discipline of debt repayment’.
At the same time, the director disclosed that KBA was working with the Central Bank of Kenya to select possible credit reference bureaus and help curtail the number of serial defaulters who borrow funds without the intention of paying them back.
He predicted that the Credit Reference Bureau’s business is about to kick off in the country after the regulations, which compel institutions that are licensed under the Banking Act to share credit data, came into effect on February 1, 2009.
“We hope that by the end of this year or early next year, we should be having a process that will ensure that people can share credit information,” he added.