Nairobi - The International Finance Corporation on Thursday lauded recent amendments of Kenya’s banking act that would encourage credit reporting as an important step toward stimulating improved access to finance for small enterprises in the country.

The changes were the result of collaboration within the government of Kenya, the Central Bank, and other players in the financial sector that worked to develop an appropriate legal framework.

Research in the development of private credit markets across countries indicates that institutions such as credit bureaus strongly support these markets. When lenders know more about borrowers and their credit history they tend to be more confident in extending credit.

Legal amendments, which were passed by Kenya’s Parliament and signed into law last month, provide for mandatory sharing of negative creditor information among banks and bureaus. The amendments also provide for the minister of finance (through the Central Bank) to issue rules on the regulation of credit bureaus, and authorise the Central Bank of Kenya to issue circulars on the nature and format of the information to be shared progressively.

The Central Bank of Kenya has spearheaded the banking sector reforms and is preparing draft regulations. It plans to have them published for comment by the end of February 2007.

“Banks are presently unwilling to lend to small enterprises due primarily to lack of good credit information,” said IFC Senior Manager Jean-Philippe Prosper. “International experience suggests that the use of credit information allows banks to reduce loan processing time and cost by 25 percent or more and lower default rates by 40 to 80 percent, contributing to the improved profitability of financial institutions and stability of the financial system.”

In March 2006, stakeholders including the Central Bank, the Kenya Bankers Association, and the East Africa Credit Bureau Association convened the East Africa credit reporting workshop to address constraints to credit access in the region. Among the recommendations were proposals to amend the banking act in order to remove impediments for banks to share credit information.

Research carried out by the East Africa Institute of Bankers into the factors predicting the potential and ability of small enterprises to repay their loans also established credit history as the most reliable predictor. The research, which was supported by IFC, led to the development of a generic credit scoring tool. The new law will allow users to significantly improve the predictive power of credit scoring in Kenya and enable banks to use credit scoring in processing loan applications.

Salma Mazrui of the East Africa Credit Bureau Association said, “Banks need to take advantage of this development. Effective credit reporting is good for the banks as it will improve risk management and lower the cost of credit decisions. For well performing small and medium enterprises, it will lower their borrowing costs and reduce the requirement for onerous collateral conditions.” Business in Africa Online