With new risk-based pricing systems for loans on the horizon in Kenya, it’s becoming increasingly important for both consumers and financial institutions to understand how credit scores can help enable the right conversations. TransUnion Kenya is urging lenders to focus on individual credit scores to make smarter decisions and empower consumers to take control of their financial health.
When you take a look at the Kenyan market, the need for a new pricing system for interest rates, be it risk-based or not, becomes increasingly clear. “Many banks currently take a blanket approach to pricing,” says TransUnion Kenya CEO, Billy Owino. “This means when a customer applies for a financial product, the risk associated with the individual is rarely a factor when determining the interest rate charged,” he explains. This, along with climbing interest rates, is partly what prompted a change in law* over two years ago to cap loan charges at four percentage points above the benchmark Central Bank Rate.
Interest rate capping, along with other wider economic factors, has contributed to the changing dynamics of the market, with growth in consumer lending by banks slowing to 4% from a high of 12% prior to the caps**. Lending to SMEs is down by Ksh 250 billion, leaving a gap in finance availability to this important sector of the Kenyan economy.
Owino explains that credit scores can be used to spark the right kind of conversations between banks and customers, and build a healthy and formalised lending sector. “By looking at a customer’s credit score and other risk indicators, banks can start having meaningful conversations about a customer’s financial needs and what can be done to meet those needs in a sustainable way,” says Owino.
Since 2014, banks and other regulated microfinancers have been sharing positive and negative credit data for consumers with the Credit Reference Bureaus. Since then, other lending institutions such as Savings and Credit Cooperative Organisations (SACCO) and fintechs, have also joined this network of data sharing. Credit data comprises of a consumer’s repayment patterns on their borrowings. The data is considered negative if the consumer doesn’t honour their commitments to repay agreed premiums on time. Positive data on the other hand, reflects repayments made on time.
“Prior to 2014, credit data held at credit bureaus was mostly negative hence the misunderstanding around blacklisting. That has since changed,” explains Owino. “Today, the sharing of positive data benefits the lenders and consumers alike, enabling more informed lending decisions and tailored pricing.”
Risk-based pricing does exactly what the name suggests: lenders price their products according to their customers’ individual risk profiles. Customers that present a lower risk could get better interest rates. “It’s a sign of an evolving credit market that is becoming more sophisticated and competitive,” says Owino, who explains that TransUnion has seen these kind of developments in other international markets and understands the challenges and opportunities that can be unlocked.
“It’s a vital strategic move in a world where mobile loans are increasingly available and are eating away at established lenders’ target markets,” says Owino. An essential part of any loan application process, the credit score on a credit report, shows the consumer’s personal information, credit listings (including repayment data and performance information) and any enquiries made against them.
For banks, a consumer credit score gives a clearer view of the risk associated with bringing the customer on board. Not only does this allow them to target the right profiles but it gives them the chance to differentiate themselves in the eyes of their customers whilst also potentially improving their own bottom line.
For consumers, the report helps them actively manage their credit and plan their financial future, as they have a better idea of what to expect when applying for finance. For those with a healthy credit profile, it also helps them secure better terms.
Unfortunately, many consumers don’t know how to access their credit report, let alone how to use it to get better loan terms. This presents an opportunity for lenders to educate their customers on how to access their personal credit information, and use that information to actively improve and maintain their credit profile – something that will benefit them way beyond a current loan application.