You probably don't know that once your name is submitted to the Credit Reference Bureau (CRB), as a defaulter, you remain listed for 5 years even after you repay your debt and the Kshs 2,000 clearance fee.During these five long years, lenders will treat you as a high risk borrower. Some might give you a loan at a high rate of interest and others might flatly refuse to advance you any form of credit on account of your name having appeared on the list of defaulters. Note that in Kenya it is illegal for a financial institution to deny credit to a deserving person or institution. But being listed with CRB might be enough grounds to justify a decision not to lend to that individual or institution.
A question arises; is being listed with CRB, true representation of a data subject's (borrower's) credit worthiness? Certainly not. Statistics show that more than half of Kenyans listed with CRB found themselves in the predicament after failing to pay a debt of Kshs 100 or less. Most of these debts emanated from mobile phone loans. Others are bank transaction fees such as account closure charges.
Serial defaulters and borrowers who have defaulted on debts of Kshs 100,000 or more account for less than 5% of those listed with CRB.
Banks are misusing CRB, which is supposed to be a credit information sharing system. The most sought after information, by lending institutions, is whether a borrower is listed or not. Being on the list is enough reason for most lenders to deny credit to a potential borrower. No financial institution goes deeper to analyze a borrower's borrowing history. This is a limited and shallow utilization of CRB. In fact it can be equated to misuse of a noble idea.
Checking whether an individual or institutional borrower is listed while ignoring historical information that elevates the standing of that borrower is akin to judging a book by its cover.
Banks and other lending institutions are also misusing CRB as debt enforcement agency. Some borrowers have been referred to CRB with little or no prior communication. In fact some banks automatically submit a borrower's name after the lapse of a payment deadline. You would expect a borrower to first be transferred to a watch-list after defaulting for say 3 months.
Finally, the definition of a defaulter is vague. There are borrowers who have genuine reasons of missing a payment or paying an installment late. It is only reasonable to put such people on a watch-list for sometime. Defaulters should be classified by the lending institution depending on the duration that has lapsed without them making payments or showing any effort to pay. The norm is to declare a borrower as doubtful after 180 days.